A Level Economics AQA Practice Exam

What is the focus of behavioral economics?

1. The impacts of financial markets on individual choices

2. Traditional economic theories without psychological factors

3. The influence of psychological and social factors on decision-making

4. The role of government policy in regulating markets

The correct answer is: The influence of psychological and social factors on decision-making

The focus of behavioral economics is on the influence of psychological and social factors on decision-making. This branch of economics recognizes that individuals do not always act rationally and are often influenced by cognitive biases, emotions, social norms, and various psychological factors. Behavioral economics seeks to understand how these elements affect individuals' economic choices and how they deviate from the predictions of traditional economic theory, which assumes rational behavior. By incorporating insights from psychology into economic analysis, behavioral economics provides a more comprehensive view of how people make financial decisions, thus enhancing our understanding of market behavior and consumer actions. This focus helps explain phenomena such as why people may invest in risky assets despite the potential for loss or why they fail to save adequately for retirement. In contrast, the other options do not encapsulate the central theme of behavioral economics. For instance, while the impacts of financial markets on individual choices may be a relevant aspect of economics, it does not specifically address the psychological underpinnings that behavioral economics focuses on. Traditional economic theories without psychological factors represent classic modeling that does not account for irrational behavior, which is a key tenet of behavioral economics. Lastly, the role of government policy in regulating markets pertains more to public economics or market failure, rather than the individual-level decision-making