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HomeHomework HelpeconomicsBehavioral Economics Basics

Behavioral Economics Basics

Behavioral economics is the study of how psychological factors influence economic decision-making, while financial literacy refers to the knowledge and skills necessary to make informed financial decisions. Together, they examine how individuals' behaviors and cognitive biases affect their understanding and management of financial resources.

intermediate
5 hours
Economics
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Overview

Behavioral economics merges psychology with economic theory to explain how people make financial decisions. It highlights the impact of cognitive biases, such as overconfidence and loss aversion, which can lead to irrational choices. Understanding these concepts is crucial for improving financial li...

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Key Terms

Cognitive Bias
A systematic pattern of deviation from norm or rationality in judgment.

Example: Overconfidence in investment decisions.

Nudge
A subtle policy shift that encourages people to make decisions that are in their broad self-interest.

Example: Automatically enrolling employees in retirement plans.

Prospect Theory
A behavioral economic theory that describes how people choose between probabilistic alternatives that involve risk.

Example: Investors may avoid stocks due to fear of loss.

Mental Accounting
The tendency to categorize and treat money differently based on its source or intended use.

Example: Spending a tax refund on a vacation instead of saving it.

Loss Aversion
The principle that losses have a greater emotional impact than an equivalent amount of gains.

Example: Investors holding onto losing stocks to avoid realizing a loss.

Anchoring
The cognitive bias where individuals rely too heavily on the first piece of information encountered.

Example: A high initial price influencing perceptions of value.

Related Topics

Consumer Behavior
Study of how individuals make decisions to spend their available resources.
intermediate
Investment Psychology
Exploration of psychological factors that influence investment decisions.
advanced
Financial Decision Making
Understanding the processes behind making financial choices.
intermediate

Key Concepts

Cognitive BiasesNudgesProspect TheoryMental Accounting