Behavioural economics explains why people often make decisions differently than classical economic models would predict. It is emotions, habits and cognitive biases that shape many of our everyday financial choices.
Table of contents:
- Behavioural economics — what is it? Examples of behavioural economics
- What is behavioural economics?
- The foundations of the behavioural approach
- Behavioural economics – key assumptions and most important theories
- Methodology – how is behavioural economics studied?
- The role of psychology in behavioural economics
- Practical examples of economic decisions
- How can behavioural economics be used in business in a practical way?
- Classical economics vs behavioural economics — Spot Group expert explains
- Would you like to gain a better understanding of decision-making processes? Do so with the Meeting Group.
- What else should you know?
Main conclusions
- Behavioural economics shows that people do not make decisions in a fully rational manner, as they are influenced by emotions, heuristics and cognitive biases.
- Key theories such as Prospect Theory and the concept of bounded rationality refute the model. economic man dominant in classical economics.
- The methodology of behavioural economics is based on experiments that reveal people's actual behaviour in conditions of uncertainty.
- Psychology is fundamental to understanding decision-making processes because it explains the mechanisms of thinking and risk perception.
- Companies achieve better results when they apply behavioural economics principles to the design of their offerings, communications and customer decision-making environment.
Behavioural economics — what is it? Examples of behavioural economics
Behavioural economics is a field that explains why people often make irrational economic decisions under the influence of emotions, heuristics and cognitive biases. Examples of behavioural economics include loss aversion, the anchoring effect, excessive investor confidence and nudges encouraging saving.
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What is behavioural economics?
Behavioural economics is a field combining economics and psychology that studies decision-making under uncertainty and explains why people often deviate from rational models. It combines neoclassical economic theory with cognitive psychology, experiments and analysis of real behaviour, showing that the model economic man does not reflect the actual decision-making process. Thanks to the work of Kahneman, Tversky, Thaler, Simon and Smith, modern models explaining cognitive errors, risk assessment and mechanisms described in „Prospect Theory” from 1979 were created.
The foundations of the behavioural approach
In contrast to the neoclassical model of rationality, behavioural economics emphasises the operation of simplified rules of thinking, such as availability, anchoring and representativeness heuristics. Cognitive psychology began to explain processes that economics had previously overlooked – the functioning of the brain as a decision-making tool, automatisms and emotions. Experimental research has shown that people make decisions based on patterns rather than cold calculation.
Example: instead of analysing data, an investor makes a decision based on the latest market news – this is a classic example. framing effect and availability heuristic.
Behavioural economics – key assumptions and most important theories
Behavioural economics explains that people's real decisions differ from the predictions of classical economics because they are based on emotions, mental shortcuts and a subjective approach to risk.
1. Prospect Theory (Kahneman and Tversky, 1979)
Prospect theory replaced the earlier theory of expected utility. It showed that:
- people judge differently losses i profits,
- The loss hurts. 2.5 times more than enjoy the profit,
- In uncertain conditions, people take irrational risks.
2. Bounded rationality (Herbert Simon)
Simon demonstrated that człowiek does not strive for maximisation, but rather for satisfactory choice, because information processing has limitations.
3. Nudging – the theory of „nudging” (Richard Thaler)
Thaler, a Nobel Prize winner, showed that small changes in the decision-making environment can improve people's choices without taking away their free will.
Example: Automatic enrolment in pension schemes increases the number of savers by up to 40–60%.
Methodology – how is behavioural economics studied?
The methodology of behavioural economics is based on laboratory and field experiments that test hypotheses about economic behaviour. This distinguishes it from neoclassical economics, which is based mainly on mathematical models.
Methodological example:
The group of participants has to choose between a „certain profit of 100 zł” and a „50% chance of 250 zł” – the experiment shows risk aversion.
The role of psychology in behavioural economics
Psychology is the foundation of behavioural economics, as it provides knowledge about cognitive biases and automatic thought processes.
Psychologists such as Kahneman and Tversky introduced the following concepts to economics:
- analysis of cognitive processes,
- research on heuristics,
- experimental testing of risk responses.
Psychology explains why, in conditions of uncertainty, people do not use probability calculations but rather simplified rules.
Practical examples of economic decisions
Economic decisions often deviate from rationality due to heuristics, emotions, and misjudged risk.
Economic examples:
- The consumer chooses the more expensive product because it is placed on the shelf at eye level – the framing effect.
- The investor buys shares because „the market is rising”, ignoring fundamental indicators – excessive confidence.
- Savers put aside more money when the app shows their progress in percentage terms – an economic nudge.
How can behavioural economics be used in business in a practical way?
The practical application of behavioural economics involves designing decision-making environments in such a way that they are consistent with people's actual behaviour. It is a tool for managers, marketers, data analysts, UX designers and public institutions.
| Area | The problem | Behavioural mechanism | A practical solution |
| Finance | Too little savings | Loss aversion | Automatic enrolment in the programme |
| E-commerce | Abandoning the shopping basket | The anchoring effect | Displaying the „from” price and discount |
| HR | Low motivation | Comparison heuristics | Bonuses based on specific targets |
| Marketing | Low conversion rate | Framing | Product presentation in context |
| Management | Decision-making chaos | Bounded rationality | Simplified checklists |
Classical economics vs behavioural economics — Spot Group expert explains
Classical economics assumes that individuals are fully rational, possess complete information, and always strive to maximise utility. Behavioural economics, however, shows that real-world decisions are shaped by emotions, heuristics, and context, leading to systematic deviations from theoretical models.
As emphasised by Group expert Meeting, "Ignoring these factors in business results in inaccurate forecasts and ineffective strategies. In practice, companies that take into account the limited rationality of users and design processes in line with actual human behaviour rather than an ideal economic model achieve better results."
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What else should you know?
What is behavioural economics?
Behavioural economics involves studying how people really make decisions, taking into account emotions, intuition and cognitive biases. It shows that our choices often deviate from the pure rationality assumed in classical theories.
What is the concept of behavioural economics?
The concept of behavioural economics assumes that economic decisions are the result of psychological mechanisms and simplified rules of thinking. This makes it possible to better predict people's behaviour in real market situations.
How does behavioural economics differ from classical economics?
Classical economics assumes rational, logical consumers, while behavioural economics emphasises the influence of emotions and cognitive biases. They differ primarily in their perception of human beings and the realism of their predictions.
What is behavioural finance?
Behavioural finance examines how psychological factors influence investment decisions and behaviour in financial markets. It explains phenomena such as speculative bubbles, excessive investor confidence and loss aversion.
Summary
Behavioural economics provides precise tools for understanding how people really make decisions in conditions of uncertainty, and shows that the classical model of rationality is insufficient. By combining economics with psychology, it is possible to predict behaviours that previously seemed irrational or random. Contemporary research and experiments confirm that market behaviour is largely the result of heuristics, emotions and context. Therefore, the practical application of behavioural economics in business, finance and management allows for more accurate decision-making and more effective strategy design based on real human behaviour.
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FAQ - Frequently asked questions
What is bounded rationality and how does it influence people's choices?
Bounded rationality, described by economist Herbert Simon, shows that people do not always maximise utility according to the standard model of rational choice. In behavioural economics, this explains why decisions often deviate from classical economics and the assumptions of economics with complete information.
How does nudging work in business practice?
„Nudges” use psychology to improve users' choices without restricting their freedom, demonstrating that behavioural economics is a combination of economics and psychology. Research published in, among others, Quarterly Journal of Economics i Journal of Risk and Uncertainty prove that such interventions reduce the risk of wrong decisions and increase the efficiency of processes.
What is the significance of preferences in decision-making?
Preferences determine the subjective value of benefits and risks for an individual, which directly influences their choices and decision-making patterns. Behavioural economics has shown that preferences change depending on the context, which refutes the standard assumptions of classical economics.
Who is considered to be among the American behavioural economists?
To the group American behavioural economists include Daniel Kahneman, Amos Tversky, Richard Thaler and Herbert Simon, who introduced experimental research in economics and decision-making models. Their works, published by, among others, Princeton University Press i Oxford University Press, have become the foundation of the modern field of behavioural economics.
What role did the work of Thaler and Kahneman play in behavioural economics?
Thaler and Kahneman showed that human decisions deviate from the standard model of rational choice, introducing the concepts of heuristics, nudging and prospect theory. Within behavioural economics, their research, cited in Quarterly Journal of Economics, changed the subject of decision-making and the way risk is analysed in finance and management.
What is Prospect Theory and why is it important?
Prospect Theory, developed by Kahneman and Tversky, shows that people evaluate losses more strongly than gains, which influences decision-making models and risk perception. Behavioural economics is a combination of psychology and economics, and this theory rejects the standard assumptions of classical economics in the analysis of choices.
What are the most common cognitive errors in economic decisions?
The most common cognitive biases include anchoring, overconfidence and availability heuristics, which influence choices in real market conditions. In behavioural economics, decision-making models take into account these systematic deviations from the standard rational behaviour described in classical economics.
Why are experiments in behavioural economics so important?
Experiments in behavioural economics and economic research allow decision-making models to be tested under controlled conditions and people's reactions to risk to be measured. In behavioural economics, publications in the Journal of Risk and Uncertainty and the Quarterly Journal of Economics document that such experiments are crucial for verifying economic assumptions and the practical application of theory in business and finance.
