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Behavioral Economics and Irrationality

Why humans make seemingly illogical financial decisions.

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Key Concepts

  • Loss aversion: we fear losses more than gaining equivalents
  • Anchoring: we rely too heavily on first information
  • Confirmation bias: we seek confirming information
  • Mental accounting: we compartmentalize finances illogically

Vocabulary

Behavioral EconomicsStudying how psychology influences economic decisions.
HeuristicA mental shortcut used to make quick decisions.
Cognitive BiasSystematic patterns in deviating from rational decision-making.
UtilityThe satisfaction from consuming something.
Rational ChoiceMaking decisions based on maximizing utility.

Big Question

"If our irrationality is predictable, can markets ever be efficient?"

Discussion

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