HippoCampusBusiness & EconomicsGuidedIntermediate11 chapters
Behavioural economics: why we make irrational money decisions
Why do we make irrational money decisions? Cover loss aversion, anchoring, mental accounting, present bias and nudges, with classic experiments and everyday examples.
What you'll learn
11 chapters
- 1
From Rational Choice to Behavioural Economics
- Describe the traditional economic view of rational decision-making.
- Explain why economists began questioning the assumption that people make consistently optimal financial choices.
- Identify the broad purpose of behavioural economics as a bridge between economics and psychology.
- 2
Early Foundations: Bounded Rationality and Human Limits
- Explain Herbert Simon's idea of bounded rationality.
- Show how limited attention, time, and information affect financial decisions.
- Connect bounded rationality to common shortcuts people use when choosing under uncertainty.
- 3
Heuristics and Biases: The Kahneman and Tversky Shift
- Summarize how Kahneman and Tversky changed the study of economic behaviour.
- Explain what heuristics are and why they can lead to systematic errors.
- Recognize the significance of classic experiments in challenging rational-choice predictions.
- 4
Prospect Theory and Loss Aversion
- Explain the main ideas of prospect theory.
- Describe loss aversion and its impact on risky financial choices.
- Use classic examples to compare how people react to gains versus losses.
- 5
Anchoring: How Starting Numbers Distort Money Judgments
- Define anchoring and explain how initial numbers influence later judgments.
- Interpret classic anchoring experiments and their implications for prices and negotiations.
- Apply anchoring to everyday consumer and salary decisions.
- 6
Mental Accounting: Why We Treat Money Differently
- Explain Richard Thaler's concept of mental accounting.
- Show how people divide money into separate psychological categories.
- Analyze why this can create spending and saving patterns that seem irrational from a total-wealth perspective.
- 7
Present Bias and Time-Inconsistent Preferences
- Define present bias and explain why people overvalue immediate rewards.
- Compare long-term intentions with short-term actions in money management.
- Connect present bias to saving, borrowing, procrastination, and self-control problems.
- 8
Framing, Defaults, and the Power of Choice Architecture
- Explain how the presentation of options affects financial choices.
- Describe default effects and why they are powerful in practice.
- Relate framing and defaults to real decisions about insurance, subscriptions, and retirement plans.
- 9
Nudges: Guiding Better Decisions Without Forcing Choices
- Define a nudge and distinguish it from mandates or financial incentives.
- Explain how behavioural insights are used to improve savings and spending decisions.
- Evaluate the benefits and limits of nudges in personal finance and public policy.
- 10
Everyday Irrational Money Decisions: Spending, Saving, Borrowing, and Investing
- Integrate major behavioural concepts across common financial contexts.
- Identify which biases are most likely to appear in different money decisions.
- Practice moderate analysis by comparing behavioural explanations across cases.
- 11
Limits, Critiques, and Practical Takeaways
- Recognize major critiques of behavioural economics without losing sight of its value.
- Compare when standard economic models still work well and when behavioural models add more insight.
- Extract practical lessons for making better money decisions.
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