All Economics Terms A-Z

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Economics Terms A-Z

Behavioural Economics

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This subdiscipline of economics studies how the economic decisions made by individuals and institutions are influenced by psychological, cognitive, emotional, cultural, and social factors. Specifically, it busies itself with looking at rational decision making - and its boundaries - in contrast to how decision making is seen in classical economics.

In classical economics, decision making is seen as black and white: people make optimal decisions that always provide them with the best results in terms of satisfaction and benefit. Behavioural economics, however, shows how this isn’t the case, and that humans also make decisions that are contrary to their interests or don’t maximise benefits. It then tries to explain why this is the case.