Behavioral Economics: Understanding Consumer Choices and Irrational Decision-Making

Abstract

Behavioral economics bridges the gap between traditional economic theory and psychological insights into human behavior. Unlike classical models that assume rationality and perfect information, behavioral economics acknowledges cognitive biases, emotional influences, and social preferences that shape consumer decision-making. This study explores the major behavioral factors, including loss aversion, anchoring, mental accounting, and herd behavior, that drive irrational consumer choices. By analysing experimental evidence and real-world consumer data, this paper identifies how deviations from rationality lead to suboptimal financial, marketing, and policy outcomes. The findings emphasize the importance of incorporating behavioral insights into public policy design and business strategy to enhance welfare and predict market dynamics more accurately.