Behavioral Economics: Understanding Irrationality In Economic Decision-Making

Abstract

This review research paper delves into the interdisciplinary realm of behavioral economics, exploring the nuances of human decision-making that deviate from traditional economic models. The study acknowledges the limitations of classical economic theories that assume rational behavior and instead focuses on understanding the often irrational and unpredictable nature of human choices. By synthesizing insights from psychology, neuroscience, and economics, this paper aims to shed light on the intricate interplay between cognitive biases, emotions, and socio-economic factors that shape economic decisions. The review critically examines key concepts such as bounded rationality, prospect theory, and behavioral anomalies, providing an in-depth analysis of their implications for economic decision-making. It underscores the significance of incorporating psychological factors into economic models to better capture the complexities of real-world decision processes. Moreover, the paper explores the practical applications of behavioral economics in various domains, including finance, marketing, and public policy, emphasizing the potential for improving the design of interventions and policies. The research also highlights experimental methodologies used in behavioral economics, discussing their strengths and limitations. Through a comprehensive review of seminal studies and recent advancements, this paper contributes to the ongoing dialogue surrounding the integration of behavioral insights into economic analysis. It addresses the challenges of reconciling behavioral perspectives with traditional economic paradigms and advocates for a more holistic understanding of human behavior in economic research. This review underscores the transformative potential of behavioral economics in refining economic theories and policy frameworks, ultimately fostering a more accurate representation of human decision-making in the face of irrationality. The synthesis of multidisciplinary perspectives presented in this paper provides a foundation for future research and practical applications in the evolving field of behavioral economics.