If individuals routinely make poor decisions as Kahneman says, why is that the case? The answer lies in behavioral economics, a field which explains why people often make irrational financial choices and don’t always behave the way standard economic models predict. Behavioral economists believe that human beings are unknowingly hamstrung by overconfidence, limited attention, cognitive biases and other psychological factors which inevitably cause errors in judgment. These factors affect everything from how we invest in stocks, to how we respond to marketing offers, to how we choose which sandwich to buy for lunch.
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