The Role of Behavioral Economics in Financial Decision-Making and Market Analysis

Abstract

Behavioral economics is a relatively new field that grew in popularity in the 20th century that largely seeks to explain the areas where neoclassical economics fail. It does this by repudiating the fundamental premise of the "rational actor" presented in neoclassical economics and instead identifies economic actors to be human and therefore likely to engage in irrational behaviors that are detrimental to their financial interests. This paper will address the market feasibility of behavioral economics, highlight examples wherein individuals and sub-stratums of the populations clearly violate logical decision-making. Additionally, the root causes of this phenomena will be discussed, involving cognitive biases and evolutionary psychology. From this research, some insight may be gleamed for investors, policy-makers, and the general populace on how to identify when subconscious drives are putting finances and investments at risk, and how to quell this behavior when it comes to protecting your interests, as well as recognizing this tendency in others when it may come to accruing capital from faulty investments made by other market actors.

Keywords: Behavioral Economics, Economics, Finance, Housing