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

[caption id="attachment_13503" align="alignright" width="183"] 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

[caption id="attachment_13502" align="alignright" width="179"] 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.

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