Behavioral Economics is a field that uses methods from psychology and related social sciences to understand people's economic behavior as individials and the effects of this on larger economic systems . It has significant overlap with the field of behavioral finance which is concerned with financial decision making, especially by those involved in financial institutions and stockmarkets.

Behavioral economists often look at heuristics (generalized rules that people follow), framing (the way that economic decisions are presented to those making the decision), and market inefficiencies (where people within a market system behave in irrational or less than optimal ways, for example consistently buying a higher-priced version of a product with no obvious benefit over cheaper alternatives).

Heuristics can be seen in a lot of human knowledge. They are represented informally as "rules of thumb", generalizations that are true more often than not. When heuristics are applied outside their scope -- when someone makes the assumption that, for example, a third-world farmer is going to choose from the same crops that a farmer in the Midwestern United States would - they can result in irrational decisions.

The way a decision is framed refers to how it is put to the decider. A classic explanation is contained in the 'Asian disease' experiment. In it, two groups of people were given the following scenario: Given an outbreak, and 600 people who are going to die, which plan should be implemented? After asking this question, the first group are given the choice of plan A, which will save 200 people, or plan B, which gives 1/3rd of a chance that 600 people will be saved, and a 2/3rds chance that none of them will be saved. The second group are given the same choices, but worded differently. Plan A is now described as '400 people will die', and plan B is now described as "1/3rd chance that everyone will be saved, but a 2/3rds chance that all 600 will die." In the first group, 72% of participants chose option A. However, in the second group, 78% of participants chose option B. A few moments of mathematical reflection proves that they're identical, but the way they are framed makes A or B more or less attractive.

These occur when irrational decisions appear to be made, or when information is not widely available to all agents within an economic system. Some examples include when items are priced much higher or lower than the market would predict, when consumers purchase a product despite there being cheaper, similarly effective competing products that are just as well-known, or when sales of a product or service are drastically different from what the market would suggest. Negative press, brand loyalty, and collective greed can all influence the activity of the market in a way that cannot be explained through simple technical data.

• Financial Express: Guest post about behavioral economics (October 21, 2008)

• MSNBC: http://www.msnbc.msn.com/id/27184026/ (October 14, 2008)

• Newsweek: A discussion of homeowning from a behavioral economic perspective (October 11, 2008)

• East Valley Tribune: Reduced prices of one necessity don't automatically lead to increased spending elsewhere

• Boston Globe: Co-written by Richard Thaler (April 17, 2008)