Financial issues evoke feelings of stress, terror, and — sometimes — joy. Behavioral economics investigates the emotional aspects behind economic decisions. Businesses, governments, and individuals use this discipline to connect behavior to price, consumption, and demand, to learn what these statistics can teach about influencing present and future decision-making. Behavioral economics is an integral part of daily life, even beyond basic money matters.

What is Behavioral Economics?

Behavioral economics is a research and psychology framework that juxtaposes traditional economics — where human behavior is about rationality and logical assumptions — with real behavior, where choices taken may be considered irrational and against best interests, possibly resulting in pricey trade-offs. The combination of economics and the facets of human behavior provides insights that inform the actions of many sectors, including politics, marketing, and health.



Behavioral economics' most prevalent theme is heuristics, defined as shortcuts or rules of thumb people rely on to make quick decisions. Research suggests that while heuristics is seen as producing flawed outcomes in many cases, it may be most efficient in the health sector. The concept of effective heuristics means that when emergency doctors are provided with a few key pieces of information and given a strategy, they can make better and quicker decisions than when they use more information-intensive practices.

heuristics shortcut emergency stockstudioX / Getty Images


Bounded Rationality

Bounded rationality is a term introduced by prize-winning economist Herbert A. Simon. It states that an individual’s ability to make rational decisions is limited by their cognitive abilities and the time they have to make them. This shortcut can lead to flawed decision-making. The campaigns against smoking show how bounded rationality helped influence public opinion. People were guided by the industry touting the temporary benefits of "looking cool" when smoking, while medical professionals mounted a concerted advertising campaign that educated the public about the long-term health risks.

bounded rationality smoking health Lisay / Getty Images


Prospect Theory

Prospect theory is a branch of behavioral economics that has to do with perceptions about gains and losses around a certain point of reference. Even if someone experiences logical gains, the possibility of a loss weighs more. This gives rise to loss aversion, and that fear affects future decision-making. In the realm of medicine, one study found that when faced with intense medical decisions, clinicians with more experience were less risk-averse and more accurate.

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Framing describes the presentation of negative or positive aspects in ways that affect decision-making. A few types influence economic decisions. One example is how meats are presented as "97% lean" instead of "3% fat." This kind of attribrute framing, means to convey a more health-conscious comparison with the aim of influencing consumer purchase behavior. In the case of a patient dealing with prescription information, a study showed that more gain-focused framing had better patient reception.


Market Inefficiencies

Another behavioral economics theme is market inefficiencies, also known as market failure. The definition of market inefficiency is a market that does not operate as well as it should because of miscommunication or manipulation. Healthcare is one prominent example of market failure. The bureaucratization of health systems is unmanageable, and when policymakers, insurers, and doctors try to control it, nothing happens, because stakeholders are unwilling to let go of whatever incentives they are getting.

market inefficiencies failures Peter Dazeley / Getty Images


Behavioral Game Theory

Game theory is the study of the beneficial, rational choices of players in a game with the help of theoretical models. Behavioral game theory uses real-life experimental data to better explain both rational and irrational decisions. Where this theory interacts with behavioral economics is in assessing how incentives and deception influence financial decisions. In the healthcare industry, behavioral game theory looks at the issue of a doctor choosing to prescribe drugs or providing counseling on improving lifestyle, and the likelihood of the patient to comply with either piece of advice.


Nudge Theory

Poor decision-making can be the result of habits, biases, or cognitive boundaries influenced by emotional needs, which may seem irrational and challenging. Nudge theory states that these patterns can be nudged towards better or more beneficial options. There are patient-focused examples of this in medicine. One study showed that personal nudges created to help patients take their medications were six times more effective than negative responses.


Evolutionary Psychology

Evolutionary psychology suggests that much of human behavior is based on internal mechanisms that are products of natural selection. These mechanisms helped ancient ancestors survive, and researchers believe that evolutionary psychology explains irrational decision-making, including certain forms of bias. Some experts believe the evolutionary economics paradigm may help economists produce more accurate descriptive and predictive models.

evolutionary psychology natural selection Radachynskyi / Getty Images


Artificial Intelligence

As the health sector turns more to algorithms to crunch data and find new medicines, there are plenty of opportunities for artificial intelligence and behavioral economics to interact. Machine learning provides predictive variables that measure biological states and the effects of social influences and constraints on financial choices. There is also the opportunity for unstructured bargaining experimentation, which helps researchers understand cognitive, physical, and psychological responses to financial offers as a way of keying-in on individual decision-making practices.

artifical intelligence bargaining Viaframe / Getty Images


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