Understanding Behavioral Economics


Behavioral economics is the study of psychology in correlation with economic decisions. While traditional economics assumes that humans are rational individuals that tend to choose the most profitable solutions, recent studies have shown that behavioral patterns can highly influence the economy. Although economists are well aware of the fact that humans sometimes make economic decisions based on their instincts, they suggest that these events are random and cannot be measured in order to create an economic pattern.

The purpose of behavioral economics is to understand what generates unprofitable economic decisions. Behavioral studies are aimed at understanding the psychological aspect of economic decisions in order to improve economic predictions and ultimately improve the economy. Traditional economics are based on general assumptions that apply to any field of economy. On the other hand behavioral studies try to narrow down the random factors by adding a few more parameters to the general studies. What drives people to decide what to consume, how to invest their money, how to save money, how to advance in their careers can be considered random factors. However understanding these factors can help educate people into being more productive and achieving a higher standard of living. Therefore we can assume that the purpose of behavioral studies is to actually turn the humans into the rational individuals that are portrayed in traditional economic theories in order to build a strong and steady economy.

One of the field where behavioral economics has proved to be quite successful is savings. A great variety of studies have shown that when it comes to saving money people can be quite irrational. Even when they are well aware of the necessity of saving they lack the self control to do it and therefore choose to postpone it. However people are becoming more and more aware of their lack of self control and are trying to find ways to deal with it such as pension plans or high tax withholding. These are excellent examples of the positive impacts of behavioral studies. Authorities are helping citizens be responsible with their earnings by providing money saving solutions. Therefore by saving money in a responsible manner an individual is able to maintain his standard of living throughout his life.

The behavioral aspect of economy is very complex. So far, behavioral theories had been criticized by traditional economists due to the fact that they base too many assumptions on studies made on student subjects. While some behavioral aspects remain constant during one’s life others change when confronted with economic responsibilities. Furthermore this side of economy is very recent and still needs to undergo multiple transformations in order to be a well defined science.