Behavioral economics

Welcome. We'll explore behavioral economics, a field at the intersection of economics, psychology, and decision science. While traditional economic theory assumes individuals are rational agents. Maximizing utility, real world observations show our decisions often diverge from rationality due to cognitive biases, limited information, and emotional influences. Pioneers like Karaman and Tversky highlighted systematic departures from rationality, introducing concepts like heuristics, biases, and framing effects. Behavioral economics aims to understand and map these deviations, providing a more accurate view of human behavior in markets, negotiations, and daily choices. Let's consider the psychological mechanisms behind economic decisions. People often rely on mental shortcuts or heuristics, which save time, but can introduce predictable errors. For example, the anchoring effect causes individuals to focus too much on an initial piece of information, often leading to sub optimal outcomes. Loss aversion means we hate losing more than we value equivalent gain, which explains the reluctance to sell losing stocks or the endowment effect. Over confidence and confirmation bias also distort investment choices, impacting stock trading and even markets, amplifying booms and busts. Behavioral economics is especially useful for analyzing market phenomena that classical theory cannot fully explain. In the stock market,