Economics as we all know has acquired an acronym of a ‘social science’ essentially because the science deals which making choices, which in turn depend on individual behavior that forms the sovereign as a whole. It is indeed individual psychology that derives a response to the politics and incentives that the government brings forth the masses. Hence, it becomes extremely essential to study this human psychology to respond to the externally provided environments and the particular subjects under the ambit economics that studies this human behavior is called ‘Behavioral Economics’.
Behavioral economics and the related field, behavioral finance, study the effects of psychological, social, cognitive, and emotional factors on the economic decisions of individuals and institutions and the consequences for market prices, returns, and the resource allocation. It typically integrates insights from psychology, neuroscience, and microeconomic theory. There are three prevalent themes in behavioral economics, firstly there is ‘Heuristics’ that is, people almost always make decisions based on rules of thumbs and not strict logic. Second component is ‘Framing’ which is a collection of anecdotes or stereotypes that make up the mental emotional filters individuals rely on to understand and respond to events. Thirdly, there is ‘Market Inefficiencies’ which includes mispricing and non-rational decision making.
Standard economics theory suggest that as long as people understand the full consequences of their actions, they tend to act in their self-interest i.e. they try to maximize their utility and profits. However, this is not always possible. However it becomes difficult to study human behavior in response to the policies implemented by the government or the central bank sometimes due to the presence of number of other factors that equally influence each other.
Behavioral Economics an interesting matter if interest.