Behavioral Economics and Decision Making

In economic studies, conventional approaches assume people are reasonable beings who are strictly matter-of-fact in their insistence on decision-making that maximizes their welfare. On the other hand, however, real experience can contradict theoretical assumptions. Behavioral economics is a special field that is made to acknowledge the difficulties involved in psychological processes and to explore how behavioral biases, feelings, and limited cognitive functions impact decision-making. In this article, we trace the intriguing landscape of behavioral economics and the circumstances that this expression creates to portray human behavior.

The Foundations of Behavioral Economics:
The discipline of behavioral economics came to the fore in the late twentieth century owing to economists exploring the phenomenon of frequently anomalous individual deviations from the rational decision-making models. Visionaries paved the way, e.g. Kahneman and Tversky, by overthrowing the traditional economic oeuvre of Homo economicus, the flawed version of a human being who always acted rational, by showing the imperative nature in which heuristics and cognitive biases affected human decision-making.

Key Concepts in Behavioral Economics:

Prospect Theory:
Despite many ideas, Kahneman and Tversky developed the prospect theory, which suggested that risk and benefit evaluations based on changes are relative; they are based on the starting point. On the other side, people commonly get lost with fear in the face of winnings and are aggressive in case of a loss.

Loss Aversion:
Loss aversion can be defined as the desire of an individual to avoid a specific loss even more strongly than he wants what is equal in value to that loss. Research indicates that psychologically, people tend to react stronger when they sustain a loss compared to the times they experience gains of the same amount.

Anchoring:
We make an anchoring mistake that is we weigh too much the first piece of information heard as we deal with making our decisions (the "anchor"). Just by the nature of the anchor, it is irrelevant, arbitrary, or sometimes nonexistent, but it can still have a considerable effect on future decision-making.

Confirmation Bias:
Researchers tend to seek out facts, which are in agreement with their preconceived conceptions while disregarding or inventing reasons for assumptive evidence. This bias may cause making faulty decisions by reducing the acquisition of views from different standpoints.

The Endowment Effect:
A phenomenon called the endowment effect is described as the condition when an individual attaches a higher monetary value to the item he owns than to an identically equivalent item he does not own. The above-mentioned phenomenon points out that the status of ownership defines how one perceives a book's value.

Implications for Decision Making:
After studying these issues of behavioral economics the conclusion is obvious that the mechanisms of behavioral economics are significant from the perspective of finance, marketing, public policy, health care, and many others.

Behavioral economic, and financial market bubbles are an interesting topic of research, and investors' mental abnormality may cause the undervaluation of assets. The science of behavioral economics has additionally become the base for the creation of such long-term savings plans as these usually imply certain nudges or fiscal imposition of better decisions.

Marketing of businesses can now be approached as a science. Psychological biases can be used in advertising to attract customers and as a tool to determine the optimum price for goods. Strategies such as framing–the way of displaying information in what is either gain or loss to consumers’ minds– can have a big impact on how those perceive and buy products.

In terms of policymaking behavioral economics has triggered a kind of intervention that is termed "nudge". Nudges act as a means to prompt individuals to make better choices without abusing their freedom. Likewise, food arrangements that endorse healthy eating in school cafeterias such as the location of school health food at eye level persuade students to choose a healthy and nutritious diet.

The theory of behavioral economics is of prime significance in creating policies to increase compliance of patients with medical treatments and lifestyle changes. Through the discovery of psychological obstacles to behavior modification, clinicians may develop interventions that could fit in with such aspects of patients' problems and factors as their uniquenesses and motivations.

Conclusion, Using behavioral economics a compelling framework for understanding the diversified nature of human decision-making is offered. They can do that through the acknowledgment of the fact that cognitive shortcuts and biases are very crucial in economics, politics, and various businesses, and thus more appropriate models and solutions could be made that will match human behavior. Generally, the linking of lessons learned from BE to the assorted areas is a step that has considerable weight because it yields more practical, compassionate approaches to eliminating societal problems and improving personal well-being.