An approach to economic analysis that incorporates psychological insights into human behaviour to explain economic decisions. Behavioural economics is motivated by the observation of anomalies that cannot be explained by standard models of choice. It provides an explanation for the anomalies by introducing human and social cognitive and emotional biases into the decision-making process. In most applications choice behaviour is still modelled as the maximization of utility subject to constraints; the difference between traditional economics and behavioural economics being in the form of the utility function. See also Prospect theory.

libertarian paternalism An approach in the design of policies aimed at guiding individual choices in a way that improves the individual well-being where a policy-maker believes that individuals will not act in their own best interests otherwise. This approach is paternalistic because the judgement of the outcomes of individual behaviour is based on the policy-maker’s preferences. It is libertarian because individuals have freedom to opt out of the arrangements offered by a policy. The concept of libertarian paternalism was introduced in 2003 by Cass Sunstein and Richard Thaler and quickly became one of the most successful applications of behavioural economics. See also Behavioural Insights Team .