Behavioral economics (BE) is a school of thought in economics which accepts that humans do not always act rationally, have stable preferences, or act to maximize their own gains. It has the view that economics is inextricably linked to other disciplines, such as sociology, psychology, and neuroscience. BE is often used to design pricing structures to maximize sales.
Traditional economics has always assumed human rationality in market systems—the main premise being that people will always have stable preferences and act according to their interests in order to maximize gains. BE has depended heavily on psychological experimentation to show that humans are actually riddled with a range of biases that affect how they act, think, and feel. According to BE, human thinking is subject to insufficient knowledge, feedback, and processing ability. Our thinking often has to work to resolve uncertainty; it’s affected by the context in which we are called to act. As such, our rationality is “bounded.” Daniel Kahneman and Amos Tversky, pioneers of BE, explain this by assuming that humans make decisions under a dual system of thinking: one works with processes that are intuitive, experience-based and relatively unconscious, and the other through controlled, reflective, deliberative and analytical processes. Our cognitive ability, bias towards the present time, and influences of our society affect our ability to make decisions under the latter system. We can apply the research of decision-making and risk-taking in BE practically to many aspects of design and help shape the user experience with products.