Editing Behavioral Economics (section)

== <span style="color: #FFFFFF;">Understanding</span> ==
Behavioral economics challenges the "perfect" world of classical models.

'''System 1 and System 2''': Proposed by Daniel Kahneman. System 1 is fast, instinctive, and emotional (intuition). System 2 is slower, more deliberative, and logical. Most economic models assume we use System 2, but in reality, we often rely on System 1, which leads to predictable biases.

'''Reference Points''': We don't judge wealth in absolute terms but relative to a reference point (usually our current state or a social peer). This explains why a person with $1M can feel "poor" in a neighborhood of billionaires.

'''Social Preferences''': Humans are not purely selfish. We care about fairness, reciprocity, and social standing. This is demonstrated in the "Ultimatum Game," where people often reject "free money" if they feel the offer is insultingly unfair.

'''Intertemporal Choice''': We struggle with consistency over time. Our "present self" wants the donut, while our "future self" wants the health. Classical models assume we have a constant discount rate; behavioral models use "hyperbolic discounting" to explain why we procrastinate and fail to save for retirement.
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