Have you ever heard anything about behavioral economics? It is a whole subject of study that tries to explain how the economy works from a psychological perspective of the investor. Behavioral economics is primarily interested in explaining why individuals often behave differently from a rational agent, moving away from one of the fundamental assumptions of classical economics. The same happens with behavioral finances that move away from the assumptions of traditional finances.
However, behavioral economics does not arise as an opposition to conventional economic theory but as a discipline that complements and enriches it by providing knowledge from psychology, neuroscience, anthropology or sociology to better understand the decision-making process. economics of individuals. In the words of Richard Thaler, behavioral economics has provided economists with a greater wealth of analytical and experimental tools to understand and predict human behavior. Unlike conventional economic theory, which considers the decision-making process to be based on careful analysis and calculation of all available options, behavioral economics considers emotions and intuition to play a fundamental role in this process.
We have already said that the economy has to do above all with incentives and motivations. The traditional incentive has been money, for example, when the decision to work is explained as a balancing act in which wages persuade workers to give up their free time. In behavioral economics, psychologists provide a broader explanation of motivation, specifically differentiating extrinsic from intrinsic motivations. Extrinsic motivations include rewards and punishments that are external to us (money is the most obvious, but physical punishment is another example). Then there are the intrinsic motivations, such as pride in a job well done, a sense of responsibility, and intellectual commitment. We must know some of the most famous behavioral experiments of psychologist Dan Ariely and his team (Ariely, 2008).
All these insights from behavioral economics are changing traditional economics and are also influencing policy design through the so-called 'nudge', as highlighted in the introduction. Are there, therefore, new horizons for behavioral economics or do we already know everything there is to know? More evidence is needed to show how robust and effective push policies really are, and progress has already been made in that regard. Another area largely ignored until recently is behavioral macroeconomics. The British economist John Maynard Keynes was one of the first to analyze psychological influences, specifically social conventions, on financial markets and the consequences for the macroeconomy in general (see, for example, Keynes, 1936).
But why is it important? Considering all of these principles before making an investment decision could help you see a little more of the big picture and reduce financial risk.