Behavioral economics is the subfield that relaxes the classical assumption of the fully rational, perfectly informed decision-maker by incorporating psychological, social, and emotional determinants of choice. Its central constructs are bounded rationality — the claim that limits on information, time, and cognitive capacity prevent agents from optimizing — the framing effect, whereby logically equivalent presentations of the same options yield different choices, and loss aversion, the asymmetry by which the disutility of a loss exceeds the utility of an equivalent gain, producing risk-averse rather than risk-neutral behavior. The field stands to classical economics as a correction of scope rather than a refutation: aggregate laws such as the law of demand hold in most cases, and behavioral theory specifies the conditions under which individual decision-making departs from the model, much as a well-supported general theory can still fail outside its domain of validity.
Behavioral economics is the subfield that relaxes the classical assumption of the fully rational, perfectly informed decision-maker by incorporating psychological, social, and emotional determinants …