Why do we sometimes buy things we don’t really need, or put off saving for the future, even when we know it is important? These everyday financial puzzles are at the core of behavioral economics, a field that explores how psychological factors influence economic decisions.

What is behavioral economics?

Behavioral economics explores how human psychology, including our thoughts, emotions, and habits, shapes financial decision-making. It combines psychology and economics to explain everyday choices, such as why people delay saving for the future or value money differently depending on its source.¹,²

The field reveals that people don't always act like perfectly rational decision-makers. Instead, they can be influenced by things such as mental shortcuts, societal expectations, and limited self-control. This contrasts with the traditional economic model, which typically assumes that people always make the most logical choices.³ Behavioral economics aims to add more realistic insights into this model, particularly regarding how people actually behave.

What are the key concepts of behavioral economics?

Behavioral economics rests on a few foundational ideas, many of which were introduced or popularized byRichard H. Thaler, the Charles R. Walgreen Distinguished Service Professor of Behavioral Science and Economics at the University of Chicago and recipient of the 2017 Nobel Memorial Prize in Economic Sciences.⁴

Since the 1980s, his work has focused on analyzing how people make economic decisions through the lens of psychology. His research has profoundly influenced many areas of economic thought and public policy,⁴ shaping three concepts that remain central to the field today:

1. Mental accounting

Mental accounting is a concept that describes how we assign different values to money depending on its origin or purpose. For example, people often treat an unexpected bonus as ‘fun money’ to be spent freely, while carefully guarding their monthly salary, even though both have the same value.⁵ 

2. The endowment effect

Thaler observed that people tend to value something they own more highly than an identical item they do not. This bias explains why selling a possession can feel like a loss, leading us to demand a higher price than we would be willing to pay for the same object.⁶

3. Nudge theory

Among Thaler’s most significant contributions is the popularization of the nudge theory. Together with American legal scholar Cass R. Sunstein, the pair brought the idea to a wider audience through their 2008 book Nudge: Improving Decisions About Health, Wealth, and Happiness.⁷

A "nudge" is a small adjustment in how choices are presented that makes it easier for people to make beneficial decisions without taking away their freedom to choose. For example, a company might set retirement plan enrollment as the default option so employees are automatically signed up, while still giving them the choice to opt out.⁸

What are examples of behavioral economics in real life?

Behavioral economics continues to be widely studied today because of its tangible impact on real-world decision-making, including at the institutional level. Building on Thaler’s contributions, many organizations and governments have applied behavioral insights to design simple yet effective interventions that encourage positive behavior and favorable outcomes, without limiting individual freedom of choice.

For example, in 2012, the UK's Behavioural Insights Team (BIT) improved tax compliance among late filers by adding a single line to reminder letters: informing recipients that most people in their area had already paid their taxes.⁹ This seemingly minor nudge proved highly effective, generating an additional GBP 4.9 million (approximately USD 6.5 million) in payments from a sample of 120,000 delinquent taxpayers. It demonstrated how small, evidence-based interventions can deliver meaningful and cost-efficient results without monetary incentives.⁹

Similarly, Italy's national energy regulator (AEEGSI) applied social comparison nudges to encourage more efficient energy use.¹⁰ In a controlled experiment, participants received information framed in different ways, such as highlighting potential losses from inefficient use or comparing their performance with more efficient peers. Reflecting core behavioral insights, including loss aversion and the value of continuous feedback, the study found that cost-based, real-time feedback was particularly effective in raising awareness and reducing consumption. These insights were later used to redesign electricity and gas bills nationwide, turning routine interactions into opportunities for long-term efficiency gains.¹⁰

Final thoughts: fully numbers, fully human

At its core, behavioral economics remains economics, but with people at the center. It does not diminish the role of numbers or rational models that define the discipline. Instead, it complements them by showing how human behavior shapes real outcomes.

Thanks to the contributions of Daniel Kahneman, Richard Thaler, and other leading thinkers, we now have a clearer understanding of why people make decisions the way they do, both in everyday life and across global systems. As societies continue to evolve, the field will continue to advance, offering valuable insights into how human psychology and economic realities are deeply connected.

For further perspectives on behavioral economics, explore UBS Nobel Perspectives & Economic Views for engaging discussions and actionable insights. Along the way, learn more about the Nobel laureates whose ideas help shape a more resilient and equitable future.

References

  1. Kenton W.Behavioral economics: theories, goals, and real-world applications. Investopedia, 2025.
  2. UBS.Building better, healthier habits with behavioral economics. Nobel Perspectives, 2023.
  3. Wilson RC.Homo economicus: meaning, overview, and criticisms. Investopedia, 2023.
  4. Nobel Prize Outreach.Richard H. Thaler – Facts. NobelPrize.org, 2017.
  5. Pilat D, Krastev S.Mental accounting. The Decision Lab, 2025.
  6. Achtypi E, Ashby NJS, Brown GDA, Walasek L, Yechiam E.The endowment effect and beliefs about the market. Decision, 2021.
  7. Thaler RH, Sunstein CR. Nudge: improving decisions about health, wealth, and happiness. Penguin Books, 2008.
  8. Radova K.Choice Architecture – Everything You Need to Know. InsideBE, 2025.
  9. Calvo-González O, Cruz A, Hernandez M.The ongoing impact of 'nudging' people to pay their taxes. World Bank Blogs, 2018.
  10. Organisation for Economic Co-operation and Development.Behavioural insights and public policy: lessons from around the world. OECD Publishing, 2017.