Behavioral vs Traditional Economics

Traditional and behavioral economics are similar in nature—both fields analyze the behaviors and interactions of economic agents and how those interactions shape our economies.

While they seem similar on the surface, behavioral economics enriches the traditional field by utilizing theories from psychology, sociology, politics, and more to create a more realistic picture of the economy.

To understand the differences between behavioral and traditional economics, first you need to understand traditional economics.

What is Traditional Economics?

Traditional economic theory relies on three fundamental assumptions:

1. People are rational.
2. People make decisions based on self-interest.
3. People will change their thoughts and beliefs based on new information.

According to traditional economics, in an ideal world, people would always make the best decisions based on a careful analysis of the costs and benefits of each option available to them. This idea assumes that rational people are unaffected by external factors and emotions and are capable of making decisions based purely on what would benefit them the most.

Considered the father of modern economics, Adam Smith published his magnum opus and the first modern work of economics, “The Wealth of Nations,” in 1776. Developed during a much quieter and simpler century, this traditional model of economics has struggled to account for today’s complex world.

What is Behavioral Economics?

Behavioral economics combines psychology and economic theory to examine why people sometimes make irrational decisions.

Behavioral economists understand that humans are emotional, easily distracted by the modern world, and susceptible to outside influences. This isn’t to say the field of behavioral economics assumes people are stupid or incapable of making well-informed decisions—it’s saying that we often make decisions in an imperfect way.

For example, let’s say you want to lose weight. The rational person understands that burning more calories than consumed is the only foolproof plan for weight loss. Traditional economics says that anyone can and should easily lose weight by simply eating less and moving more. However, anyone who has struggled with weight loss can attest to how difficult the process actually is. Sometimes we console ourselves with comfort food after a difficult day. Maybe you meant to purchase only fresh produce at the grocery store but became distracted by the colorful candy aisle.

Behavioral economics provides a lens through which we can understand anomalies in human behavior that traditional economic models cannot explain.

Behavioral Economics Education

How one pursues a career in either field is another difference between behavioral and traditional economics. Students pursuing a degree in behavioral economics dive deeper into the theories covered in economics and seek out the mechanisms and decision-making behind these models.

Behavioral economists must acquire a degree (advanced degrees are usually preferred) and work in the field to gain experience.

The Chicago School of Professional Psychology offers an online Master’s in Behavioral Economics that builds off an advanced foundation of psychology and integrates economics, financial literacy, public policy, and consumer psychology, providing a comprehensive understanding of human decision-making and consumer behavior.

To learn more about behavioral economics basics, check out this conversation with program chair for Behavioral Economics, Elizabeth Schwab, Psy.D., or fill out the form below.