Behavioral Economics: Bounded Rationality, Heuristics, and Policy Applications

Abstract

Behavioral economics integrates psychological insights into economic analysis to explain systematic deviations from the rational actor model. This article reviews the field’s core theoretical foundations and practical applications, focusing on bounded rationality, cognitive heuristics, Prospect Theory, and dual-process models of decision-making. It examines how biases such as loss aversion, present bias, overconfidence, framing effects, and status quo bias influence individual choices and generate important economic consequences. The article further discusses nudge theory and choice architecture as cost-effective policy tools for improving decisions in areas such as retirement savings, health, tax compliance, and energy conservation, while also illustrating how behavioral biases contribute to financial market anomalies. Overall, behavioral economics provides a more psychologically realistic framework for understanding human behavior and offers valuable implications for public policy, market design, and organizational management. Future research may further explore how artificial intelligence can support real-time debiasing and improve decision quality in high-stakes contexts.