Economics and psychology

The link between economics and psychology

Economics has often been described as a science that is constantly growing, but also interacting with other types of science. It has often been discussed how people tend to display a typical behaviour when it comes down to facing an economic decision-making process. Because of this, researchers and scientists have often linked economics with psychology, which is completely understandable, given the fact that most economic decisions are based on a psychological decision-making process. With this in mind, in this article, we will briefly discuss the strong relationship between the two sciences, its links, differences, and how economic decision processes are often influenced by deeper psychological aspects.

Based on this, behavioural economics represents the linked science of the two terms, and is meant to study the effects of cognitive, social, emotional and psychological factors that play an influence on the economic decisions of both individuals and the market, alongside with the consequences, which can be in the form of resource allocation, returns, market prices, higher/lower demand etc.

Main factors capable of influencing the economic decision

making process are variables, these being the occupation, gender, age, alongside with the financial risk tolerance, which has been proven to be decisive for numerous financial decisions. For those who do not know, the financial risk tolerance represents the willingness of an individual to engage in an economic-related activity, without a clear outcome.

However, while numerous aspects that tend to influence the market, and are based on behavioural economics, there are still events that remain unexplained. Such examples:

HEURISTICS
which mentions that people often tend to take decisions based on their rules of thumb approximations, rather than logic.
FRAMING
which consists of stereotypes and anecdotes with the potential of filtering mental processes, and understanding an individual’s response to a certain financial event.
MARKET INEFFIENCIES
which include both non-rational economic decisions, and mis-pricings on products and services.

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