Principles of Behavioral Economics
1. Bounded Rationality: This concept acknowledges that people don’t always make perfectly logical decisions. Instead, they have limits to how much they can think and understand. So, rather than always making the best choice, they often use simplified ways of thinking to decide.
2. Framing: How we observe choices can change how we make decisions. Sometimes, just how something is presented or talked about can affect what we choose. This is called framing. It seems like seeing things through a particular lens can sometimes lead us to make choices we might not otherwise make.
3. Heuristics: When we make decisions, we often take shortcuts. These shortcuts are called heuristics. Instead of thinking everything through carefully, we rely on rules of thumb or quick mental tricks to decide. It’s a way of making decisions faster, but it can sometimes lead to mistakes.
4. Loss Aversion: People don’t like losing things. They’re more scared of losing something than they are happy about gaining something similar. This fear of loss can make them act cautiously, avoiding risks even when there might be benefits.
5. Overconfidence Effect: Sometimes, we think we’re better at things than we actually are. This is the overconfidence effect. It means we tend to believe in ourselves too much, which can lead to making decisions that might not be as good as we think they are.
6. Anchoring: The first thing we learn about something can stick in our minds. That’s anchoring. Even when we get more information later, that first piece of information can still have a big influence on what we decide. It’s like the starting point for our thinking.
7. Herding: Sometimes, we just copy what everyone else is doing without really thinking for ourselves, this is knows as herding. It often happens in situations like the stock market, where people buy or sell stocks just because everyone else is doing it.
8. Mental Accounting: We don’t always treat money the same way. Sometimes, we put money in different mental buckets based on where it came from or what we plan to use it for. Instead of seeing money as just money, we mentally categorize it, which can affect how we spend it.