Top 3 Things You Need to Know About Behavioral Economics

If you are unfamiliar with the term, behavioral economics is the study of how emotions figure into buying decisions. It is unlike economics, which assumes humans only use rationality to decide what to spend money on. Instead, behavioral economics embraces the emotional side of buying decisions. Here's what you really need to know about it.

Stop Spending Money

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Image Via Flickr by Tax Credits[/caption] The first thing you need to know about behavioral economics is that it affects everyone, even the big businesses who study it to make informed buying decisions. They are really just practicing it on a larger scale.

Once you understand the concept on your own scale you can use it to help you spend smarter. For instance, if you get an impulse to buy something you don't really need like a bag of donuts, you'll know why you 'want' it and realize it is a purely emotional response. Then you can stop yourself before you make the bad purchase.

Easier said than done, but with practice you can do it. It's as simple as studying your own buying habits, and putting on the brakes when you are about to make an emotional (not a rational) decision.

You can avoid placing yourself in situations where you might make an emotional decision, like steering clear of Saks 5th Avenue after a bad break-up, if break-ups make you shop.

Bank on Emotion

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Image Via Flickr by DaveOnFlickr[/caption] Many businesses, banks, and investment firms use behavioral economics to decide things like when to buy and sell equities, the amount of inventory to stock, when to buy certain items, and what to do with their own money.

For instance, economics might predict a drop in pork sales during a depression because people have less money to spend on cured breakfast meats. Meanwhile, behavioral economics predicts a rise in bacon sales because depression makes people want to eat more bacon to "feel" better.

An investor using behavioral economics might bet on pork bellies before a depression, while one using pure economics might make a bet against them.

Businesses use behavioral economics in their marketing and buying decisions. They know you'll buy a bag of powdered donuts just because you "love" them. They also know you won't buy a bland fiber bar that is good for you. Bare this in mind while browsing the aisles of your favorite food store.

Save Your Self

Maybe the most important thing to know about behavioral economics is how it can help you save money. If you spend money on emotional triggers, making a critical investment decision won't come easy. But knowing your emotional side is what prevents you from making the move to save might be enough motivation to make you put money away for retirement.

People like investment advisor Steve Spinner actually study how people spend. He can create a plan that accounts for your emotionally triggered buys, and get you to your retirement goals.

Behavioral economics is a broad topic, but with this basic knowledge you can spend more wisely and invest for your future.