The importance of Behavioral Economics

Aditya Syam
3 min readJan 29, 2021

Behavioral economics aims to study various factors, such as psychological and emotional factors, which tend to affect the decisions consumers or producers make with respect to an economic situation. It also analyses how these factors and decisions may differ from those theorized by the concept of rationality in economics, which says that humans are rational beings and take decisions solely in accordance with logic. It relates to “bounded rationality” which means that human rationality is limited due to finite thinking capacity, information, and time.

In a way, behavioral economics can be considered to be an overlap of economics and psychology and.

Much of economics, especially microeconomics, is determined by the concepts of demand and supply. These are the primary forces which shape the allocation of resources in a free market. Tastes and preferences of people are important determinants of demand, and they can lead to irrational decision making by consumers in many instances. The decisions made by consumers with regards to the amount of the good demanded and the producer’s choice about how much of the good to produce are vital points in economics. In theory, they would make completely logical decisions with valid reasoning. However, according to behavioral economics, humans are often affected by emotions and bias, so their decision may not be completely logical and in their self-interest. It also aims to predict the decisions made by market actors so that this can be used to better alter the market composition and the output of firms.

This field of economics is also linked to the concept of scarcity, which is one of the central pillars in economics. The scarcity bias makes consumers feel that something that is lower in supply should automatically be more expensive, and this phenomenon is used by producers and marketers to their advantage.

Companies have been adopting behavioral economic concepts more and more to boost their sales. Although behavioral economics is essential for producers to understand to formulate their supply policies, it can also help consumers realise that some of their decisions may be illogical and may harm their interests.

Further, it is pivotal for marketing of any kind. A marketer can be successful only if he understands the psyche of his potential consumers and knows how to nudge them into picking his good over any competitors.

In the pursuit of economic study, it is no uncommon to focus solely on concepts related to changes in economic factors. The inclusion of behavioral economics can help provide a broader context to the theory and make us aware of the way consumers and producers can behave in the real world, instead of simply assuming that every actor in the market is absolutely rational and not subject to any lapses in judgement.