However, as we learn more about how the brain works through the dual disciplines of neuroscience and psychology, there is an increasing convergence with the field of economics to better understand how people make financial decisions.
This has evolved significantly in recent years and is a new field that requires some introduction and explanation.
The conventional understanding of economics and financial decision-making
It is sometimes forgotten in economics that the field is supposed to be about how people make financial decisions.
The traditional economist's view is that the world is populated by unemotional, logical decision makers who always draw their conclusions rationally. This point of view is based on the understanding that human behavior exhibits three key characteristics: unbounded rationality, unbounded willpower, and unbounded selfishness.
This has always contradicted the findings of cognitive and social psychologists, who have questioned these assumptions since the 1950s.
With the rise of behavioural neuroscience since the 1980s (particularly Kahneman's work), we are now more certain than ever about the role that emotion and bias play in all decision-making: from simple day-to-day decisions like which dress to wear to larger decisions that may affect many people.
Overconfidence and optimism are two examples of behavioral traits that can lead to poor financial decisions and deviate from the conventional model. People have also been shown to make poor decisions despite knowing they are not in their best interests due to a lack of self-control.
This is where behavioral economics has been able to intervene and change many of the traditional economic beliefs.
What exactly is behavioral economics, and how can it help you?
The effects of psychological, social, cognitive, and emotional factors on economic decisions are studied in behavioral economics and behavioral finance.
This can apply to individuals or institutions, and it entails considering the implications for market prices, dividends, and resource allocation.
Unbounded rationality, one of the three human behavior traits included in the traditional model outlined above, has received special attention, with new understandings in the field resulting from neuroscience.
Understanding how people make financial decisions can help in a variety of areas, from personal finance to organizations shaping products and attempting to increase customer sign-ups; and from the vagaries of stock market trading to governments and how they formulate financial legislation.
Perhaps, in the future, behavioral economics can help people make better financial decisions; it might even have helped if more attention had been paid to it in the run-up to the 2008 Global Financial Crisis."""
