Abstract
This chapter studies how individuals behave, and how thinking and emotions affect individual decision-making. By adding insights from psychology, behavioral economics tries to modify the conventional economic approach and to analyze how “flesh-and-blood” people act in social contexts. Anomalies are often labeled as decision-making failures or mistakes. Anomalies arise from the way humans process information to form beliefs. Heuristics describe how people make judgments and decisions based on approximate rules of thumb. Heuristics require less effort compared to a rational, calculated choices. Human decision-making is prone to phenomena like anchoring, framing, status quo bias, and inertia. Systematic biases and temporally inconsistent motivations lead to poor choices. By changing the choice architecture as the context in which people make decisions, outcomes can be improved in a way that makes choosers better off.
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