Behavioral economics

Behavioral economics studies how psychological, social, and emotional factors shape economic decisions and market outcomes, often departing from predictions based on fully rational choice.

Prospect theory: A theory of choice under risk in which outcomes are judged relative to a reference point and losses weigh more than equivalent gains. It explains why people evaluate risky gains and losses asymmetrically.
Rational choice theory: A framework that models choices as the selection of the most preferred feasible option. Behavioral models often identify where actual choices depart from its assumptions.
Daniel Kahneman: An Israeli-American psychologist whose research on judgment and choice helped establish behavioral economics. His work with Amos Tversky supplied key psychological foundations for the field.
Libertarian paternalism: A policy approach that steers choices toward welfare-promoting outcomes while preserving freedom to choose otherwise. It provides a rationale for using choice design without eliminating options.
Efficient-market hypothesis: The hypothesis that asset prices reflect available information, making persistent risk-adjusted excess returns difficult to obtain. Behavioral finance challenges its strongest versions with evidence of systematic market anomalies.
Loss aversion: The tendency for losses to have greater psychological impact than gains of equal size. This asymmetry helps explain reluctance to surrender possessions or accept uncertain losses.
Expected utility hypothesis: A model in which decision-makers choose among risky options by comparing probability-weighted utilities. Prospect theory was developed partly to explain violations of its predictions.
Amos Tversky: An Israeli cognitive psychologist whose research with Daniel Kahneman documented systematic biases in judgment and decision-making. His experiments helped reveal regular departures from expected-utility predictions.
Automatic enrollment: A system that enrolls eligible people by default while allowing them to opt out. Retirement-plan enrollment demonstrates how defaults can increase participation.
Homo economicus: An idealized model of a person who consistently makes self-interested, rational choices using relevant information. Behavioral economics replaces this simplifying portrait with psychologically grounded patterns of choice.

Linked from 67 pages