Welcome to this module on Behavioral Economics, focusing on two foundational concepts: Loss Aversion and Framing Effects. These concepts challenge traditional economic assumptions by incorporating psychological insights into decision-making.

Loss aversion is the tendency for people to prefer avoiding losses to acquiring equivalent gains. In simpler terms, the pain of losing something is psychologically about twice as powerful as the pleasure of gaining something of equal value.

Framing effects demonstrate how the way information is presented, or 'framed,' can significantly influence people's decisions, even if the underlying options are objectively the same.

This effect is powerful because it taps into our cognitive shortcuts. Instead of meticulously analyzing all data, we often rely on the presented frame to guide our judgment. This is widely used in marketing, political messaging, and public health campaigns.

Behavioral economists rigorously test these theories using experimental designs. These experiments often involve controlled environments where participants make choices under varying conditions to isolate the impact of specific biases.

For instance, to test loss aversion, researchers might present participants with gambles where they can either win money or lose money. By comparing choices when the gamble is framed as a potential gain versus a potential loss, they can quantify the aversion to loss. Similarly, framing experiments involve presenting identical choices with different wording to observe shifts in decision-making.