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Behavioral Economics: Definition & Applications

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  • 0:03 Intro to Behavioral Economics
  • 0:51 Behavioral vs Neoclassical
  • 1:45 Behavioral Economics History
  • 2:29 Behavioral Economics &…
  • 3:21 Lesson Summary
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Lesson Transcript
Instructor: Brianna Whiting
While most of us try to make good decisions, sometimes we are tempted to act on an impulse. In this lesson, we'll learn about a type of economics that studies why we don't always make the decisions that are most beneficial to us.

Intro to Behavioral Economics

Decision making is so much a part of our lives that many times we don't even realize that we are making a choice. For instance, we leave our homes at a certain time to head for work and probably don't realize that we are making a choice as to when we will leave. It is probably more of a routine rather than a conscious decision. If it takes you 30 minutes to get to work and you have to be at work by 8:00, chances are you will make a rational decision to leave your house by at least 7:30. But what happens when we make an irrational decision? What happens if instead of leaving your house at 7:30 and heading to work, you decide to leave your house at 7:45, head to a movie, and ditch work? Making a decision such as ditching work and going to a movie is irrational and is the focus of behavioral economics - and of this lesson.

Behavioral vs. Neoclassical

Behavioral economics looks at irrational decisions, specifically why we make irrational decisions. It also looks at how our irrational behavior does not agree with what economic models predict our behavior will be. Therefore, it is the type of economics that tries to explain and determine why we make decisions that are not what one would expect (for example, deciding to skip work and go to a movie).

Now, if we decide to leave our house at 7:30 and head to work, we would be making a rational decision. Neoclassical economics looks at rational behaviors, which occur when we make decisions that have the most benefit for us. Leaving for work on time and actually heading to work is beneficial to us so that we can keep our job. It is important to point out that not all rational behavior centers around receiving the most money or material things, but rather centers around receiving the most satisfaction, even if that satisfaction is emotional.

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