What is Behavioral Economics?

Let's take a look at Behavioral Economics, which for those of you who have purchased the Microeconomics course, will be familiar.

Simply put, behavioral economics sits at the fascinating intersection of economics and psychology.

It challenges traditional economic assumptions and asks a profound question: Are humans truly rational when making decisions in the marketplace?

Spoiler alert: We’re not.

Instead of treating people like perfectly rational, utility-maximizing machines, behavioral economics recognizes us for who we really are—flawed, emotional, and prone to making decisions that don’t always serve our best interests.


Econs vs. Humans: Two Views of Decision-Making

To understand behavioral economics, let’s first talk about the traditional view of decision-making. Neoclassical economics assumes we behave like “econs”—hyper-rational beings who always make decisions based on perfect information, maximize utility, and never let emotions or social context interfere.

But as Nobel Prize winner Richard Thaler pointed out in 2017, these “econs” don’t exist. Instead, he argued, we’re humans—homo sapiens, not homo economicus—and our behavior is driven by a mix of rationality, emotion, and instinct.

Here’s the difference between “econs” and humans:

  • Econs: Perfectly rational, always maximizing utility, making decisions with consistent preferences and no self-control issues.
  • Humans: Bounded by limited rationality, incomplete information, social influences, shifting preferences, and, yes, self-control problems.


A perfect example of this?

Picture yourself in a grocery store checkout line. You’re committed to healthy eating, but those M&Ms at eye level suddenly seem irresistible. Before you know it, you’ve grabbed the bag and eaten half of it before even checking out. That’s not rational decision-making—it’s human behavior, and it’s exactly what behavioral economics seeks to understand.


The Key Insights of Behavioral Economics

Behavioral economics gives us tools to understand the real-world factors influencing our decisions. Here are some key insights:

  1. Bounded Rationality: Humans don’t have perfect information or the ability to calculate the “best” decision every time. Instead, we rely on shortcuts, called heuristics, that often lead to biased or suboptimal choices.
  2. Social Context Matters: We don’t make decisions in isolation. Social norms, peer influence, and cultural factors play huge roles in shaping our choices.
  3. Self-Control Challenges: From overspending to overeating, humans often struggle to align their long-term goals with their short-term impulses.
  4. Emotional and Psychological Factors: Fear, excitement, regret, and other emotions significantly affect how we approach decisions, often leading us away from purely logical outcomes.


Why Behavioral Economics Matters

The beauty of behavioral economics is that it acknowledges our humanity.

It doesn’t judge us for being irrational; it seeks to understand why we act the way we do.

For instance, companies use behavioral insights to design better products and experiences.

Why do stores place impulse-buy items near the checkout?

Because they know we’re more likely to grab them while waiting in line.

Why do apps and websites use pop-up notifications and limited-time offers?

Because they understand how to trigger our psychological biases and nudge us toward specific actions.

But behavioral economics isn’t just about business—it’s also about improving public policy and personal decision-making. For example:

  • Governments use behavioral insights to encourage healthier eating habits or higher savings rates.
  • Understanding our biases helps us design systems to counteract them, like setting up automatic savings plans to prevent overspending.


It’s the Human Side of Economics

At its core, behavioral economics is about recognizing that we’re not just economic agents driven by spreadsheets and formulas—we’re humans, with all the messiness that entails.

By studying this field, we can gain a richer understanding of why we make the choices we do and how we can shape better outcomes for ourselves and society.

So as we dive into this subject, remember that behavioral economics is not just about numbers—it’s about people.

It’s about you, me, and the decisions we make every day, from the grocery store to the boardroom.

And that’s just cool.

If you are interested in learning more, join 9,100+ students worldwide who have purchased my online Microeconomics course.

Thanks for reading.