However, there is a rising marriage between the fields of economics and neuroscience as we learn more about how the brain functions through the combined disciplines of neuroscience and psychology, in order to better understand how people make financial decisions.
This is an emerging field that has seen significant recent evolution and is deserving of a brief introduction and explanation.
The conventional understanding of economics and financial judgment
In economics, it might be easy to forget that the subject is intended to study how people behave while making financial decisions.
According to the conventional economic theory, decision-makers in the world are always logical, emotionless thinkers who always reach rational conclusions. This point of view is supported by the knowledge that human behavior has three essential characteristics: limitless rationality, limitless willpower, and limitless selfishness.
This has always been at odds with the research of cognitive and social psychologists, who began challenging these presumptions in the 1950s.
We are now more certain than ever about the role that emotion and bias plays in all decision-making, from little everyday decisions like what to wear to larger judgments that may effect many people, thanks to the emergence of behavioural neuroscience since the 1980s (particularly Kahneman's work).
Overconfidence and optimism are two examples of behavioral qualities that deviate from the established norm and may result in poor financial decisions. A lack of self-control has also been demonstrated to cause people to make bad decisions, even when they are aware that they are wrong.
Therefore, behavioural economics has been able to intervene in this situation and alter many of the assumptions underlying traditional economic ideas.
How can behavioral economics help? What is it?
The impact of psychological, social, cognitive, and emotional aspects on financial and economic decisions is examined by behavioral economics and behavioral finance.
Examining the effects on market pricing, dividends, and resource allocation is included in this and may be applicable to both individuals and institutions.
Unbounded rationality has gained particular attention among the three characteristics of human behavior listed in the classic model above, with fresh insights in the area coming from neuroscience.
Numerous areas can benefit from a greater understanding of how individuals make financial decisions, including personal finance, business product development, increasing customer sign-ups, the whims of stock market trading, and government financial laws.
If behavioral economics had received more attention prior to the 2008 Global Financial Crisis, it might have assisted people in making better decisions in the future to protect their financial futures."""