Behavioral Economics

Classical economics assumed people are rational actors — that we gather all available information, weigh costs and benefits objectively, and consistently choose what's best for ourselves. This model produced elegant theories and useful predictions at a broad scale.

One of the most robust findings in behavioural economics is that losses feel roughly twice as painful as equivalent gains feel good. Losing £100 produces a stronger emotional reaction than winning £100 produces joy. This asymmetry is called loss aversion, and it shapes financial behaviour in…

When making estimates or judgements involving numbers, people place disproportionate weight on the first number they encounter — even when that number is arbitrary or irrelevant. This is the anchoring effect: an initial piece of information acts as an anchor, pulling subsequent judgements toward it.

Humans are wired to overvalue the present relative to the future. Given a choice between $100 today and $110 next week, most people take the $100. But given a choice between $100 in a year and $110 in a year and a week, most people wait for the $110. The extra week is the same in both cases — yet…

A sunk cost is money, time, or effort already spent that cannot be recovered. Once it's gone, it's gone — no future decision can bring it back. Rational decision-making says sunk costs should be irrelevant to future choices. Only the future costs and benefits of your options should matter.

In economic theory, money is perfectly fungible — a dollar is a dollar regardless of where it came from or what it's earmarked for. In practice, people treat money very differently depending on its source, category, or label. This is mental accounting: the tendency to organise money into separate…

Humans are social animals. We look to others for cues about how to behave — especially in uncertain situations. When we don't know what the right choice is, the fact that many others are choosing a particular option feels like evidence that it's correct. This is social proof, and it drives herd…

Overconfidence is one of the most pervasive and well-documented biases in human psychology. People systematically overestimate their own abilities, the accuracy of their knowledge, and their ability to predict the future.

Humans don't evaluate their financial situation in absolute terms — they evaluate it relative to those around them. Having a comfortable income feels very different depending on whether your neighbours earn half as much or twice as much. This sensitivity to relative position is status bias, and it…

Every decision you make happens within an environment that was designed by someone. The order items appear on a menu, the default options on a form, the way choices are framed — all of these influence what you choose, often without your awareness. Choice architecture is the design of decision…

A commitment device is an arrangement you make in advance that restricts your future choices, binding you to a course of action you intend to follow but might not when the moment arrives. The logic is simple: you know that your future self will face temptations and biases that your present…

The planning fallacy is the tendency to underestimate how long a task will take, how much it will cost, and how many things can go wrong — while overestimating the likelihood of a smooth outcome. It was identified by Daniel Kahneman and Amos Tversky, and it is remarkably robust: it affects…