Behavioral economics is a subfield of economics that combines traditional economic methods of explaining human behavior with psychological insights. More realistic psychological foundations enhance the explanatory power of economic models. Behavioral economists believe they will generate better theoretical insights, predictions of field phenomena, and policy suggestions. This type of research may also be applied in the economic analysis of law.

In the traditional “neoclassical” microeconomic theory, economists explained human behavior by the model of the homo economicus, who they assumed always maximized his own happiness, called “utility.” More specifically, according to this model, people tend to maximize the difference between expected utility and cost (expected utility theory). This conception of explaining human behavior includes three assumptions: (1) unbounded rationality, (2) unbounded willpower, and (3) unbounded self-interest. ...