Economics Behavioral

Behavioral economics — the field combining psychology and economics to study how humans actually make decisions (rather than how rational agents theoretically should) — has fundamentally challenged the classical economic assumption of rationality. Daniel Kahneman (Nobel 2002) and Amos Tversky identified systematic biases in human decision-making: loss aversion (losses feel 2x as painful as equivalent gains feel pleasurable); anchoring (initial information disproportionately influences subsequent judgments); availability heuristic (overestimating probability of vivid, memorable events); and framing effects (identical choices presented differently produce different decisions). Key findings: Richard Thaler (Nobel 2017) and Cass Sunstein's 'nudge theory' — people can be guided toward better decisions through intelligent choice architecture rather than mandates (opt-out organ donation produces 90%+ donation rates vs. 15% for opt-in; placing healthy food at eye level in cafeterias increases healthy eating by 30%; automatic enrollment in 401k plans dramatically increases retirement savings). Sunk cost fallacy (continuing losing investments because of past costs); present bias (overvaluing immediate rewards vs. future benefits, explaining why people don't save for retirement); and social proof (following what others do, explaining stock market bubbles).