Terms

Behavioral Economics

Behavioral Economics

Behavioral Economics draws on psychology and economics to explore the relation of economic decision-making processes, and the reason why people make irrational decisions, based on their behavior and predictions of economic models. Considering consumer choices, market events, and human psychology, Behavioral Economics studies the effects of psychological, cognitive, cultural and social factors, revealing the unpredictability of consumers to almost certainly maintain an unpredictable market. Behavioral economics is often related with normative economics, the three most prevalent themes in behavioral economics include Heuristics, Framing, and Market Inefficiencies.

  • Investors huge a huge loss aversion which drives bad investment behavior
    • Investors are risk seeking when it comes to losses
      • they tend to invest more when at a loss with hopes of breaking even
      • they are scared to lose on the downside
    • Investors are risk adverse when it comes to gains
      • they tend to take money off the table when they have gains vs. increase the investment
      • they are scared to lose on the update