along with the related sub-field behavioral finance
, studies the effects of psychological, social, cognitive
, and emotional factors on the economic decisions of individuals and institutions and the consequences for market prices, returns, and resource allocation
, although not always that narrowly, but also more generally, of the impact of different kinds of behavior, in different environments of varying experimental values.
is a crucial factor in personal financial decision making. Risk tolerance is defined as individuals willingness to engage in a financial activity whose outcome is uncertain.
Behavioral economics is primarily concerned with the bounds
of economic agents. Behavioral models typically integrate insights from psychology, neuroscience and microeconomic theory; in so doing, these behavioral models cover a range of concepts, methods, and fields.
The study of behavioral economics includes how market decisions are made and the mechanisms that drive public choice
. The use of the term "behavioral economics" in U.S. scholarly papers has increased in the past few years, as shown by a recent study.
There are three prevalent themes in behavioral finances:
- Heuristics: People often make decisions based on approximate rules of thumb and not strict logic.
- Framing: The collection of anecdotes and stereotypes that make up the mental emotional filters individuals rely on to understand and respond to events.
- Market inefficiencies: These include mis-pricings and non-rational decision making.