Behavioral economics is a field that merges insights from psychology with economic analysis to explain why people often make choices that diverge sharply from the predictions of standard rational-choice models. Rather than assuming people act as perfectly informed utility-maximizers, behavioral economists study how real individuals actually decide under conditions of uncertainty, limited information, and emotional pressure. The field was fundamentally reshaped by Israeli-American psychologists Daniel Kahneman and Amos Tversky, whose pioneering research on cognitive biases and prospect theory earned Kahneman the 2002 Nobel Prize in Economics and laid the empirical foundation for the discipline.
Long before Kahneman and Tversky's breakthroughs, economist Herbert Simon introduced the concept of bounded rationality, arguing that human decision-making is constrained by the information available, the limits of cognitive capacity, and the scarcity of time. Because exhaustive optimization is rarely feasible, people tend to satisfice — choosing an option that is good enough to meet a minimum threshold of acceptability rather than searching exhaustively for the theoretical optimum. This stands in stark contrast to neoclassical economics, which presumes that agents process all available information and maximize utility with perfect precision.
To make decisions efficiently under cognitive constraints, people rely on heuristics — mental shortcuts or rules of thumb that simplify complex problems. Richard Thaler, another central figure in the field, framed the difference between idealized economic agents and real people by distinguishing Econs (the perfectly rational actors of textbook theory) from Humans (actual people who use heuristics, exhibit biases, and are swayed by context and emotion). Kahneman further described human cognition as operating through two systems: System 1, which is fast, automatic, and intuitive, and System 2, which is slow, deliberate, and analytical. Many of the biases catalogued in behavioral economics arise because System 1 dominates routine judgments while System 2 fails to intervene and correct errors.