People consider behavioral economics to be an affront to the field of economics for its focus on irrational behavior. The traditional economics, which can also be called the “neoclassical economics,” has been developed to understand the economic phenomena in the world we live in. The basic assumptions are self-interest, profit maximization, or purely rational. Behavioral economics avoids some of the assumptions in trying to explain a wide variety of economic behavior decisions. Traditional economics is based on the following assumptions. Firstly, all people are rational; secondly, individual choices are consistent with expected utility theory, and finally, people correctly update their opinions and beliefs based on new information that they receive (Bogan, 2019). The assumptions are not basically in the real world. This forms the basis of behavioral economics since on the fact that the psychological phenomena affect the decision-making process, and thus this must be incorporated in the economic and financial model. These phenomena include biases, heuristics, and framing effects. These foundational principles sare based on how people make systematic mistakes due to psychological blind spots.
Behavioral economics differs from traditional economics as it incorporates some aspects of psychology. The two disciplines combine and give a clear picture, and this explains why people behave in a particular way when making both financial and economic decisions. Behavioral economics also considers a systematic making of mistakes in their behaviors. These mistakes arise due to psychological blind spots. In conclusion, behavior economics assumes that the context of decision when being made has an enormous effect on the decision and preferences. An example of the phenomena that cannot be explained by the traditional economic theory is biases. These are decision making blind spots. One of the biases could be overconfidence. This is nota rational behavior. It is a behavior where people believe that they are better in skills or ability than they possess (Bogan, 2019).