Behavioral economics is the study of the psychological (e.g. cognitive, behavioral, affective, social) factors involved in the decisions of individuals or institutions, and how these decisions deviate from those implied by traditional economic theory.

Behavioral economics is primarily concerned with the bounds of rationality of economic agents. Behavioral models typically integrate insights from psychology, neuroscience and microeconomic theory.

Behavioral economics began as a distinct field of study in the 1970s and 1980s, but can be traced back to 18th-century economists, such as Adam Smith, who deliberated how the economic behavior of individuals could be influenced by their desires.

The status of behavioral economics as a subfield of economics is a fairly recent development; the breakthroughs that laid the foundation for it were published through the last three decades of the 20th century. Behavioral economics is still growing as a field, being used increasingly in research and in teaching.

Early classical economists included psychological reasoning in much of their writing, though psychology at the time was not a recognized field of study. In The Theory of Moral Sentiments, Adam Smith wrote on concepts later popularized by modern Behavioral Economic theory, such as loss aversion. Jeremy Bentham, a Utilitarian philosopher in the 1700s conceptualized utility as a product of psychology. Other economists who incorporated psychological explanations in their works included Francis Edgeworth, Vilfredo Pareto and Irving Fisher.

A rejection and elimination of psychology from economics in the early 1900s brought on a period defined by a reliance on empiricism. There was a lack of confidence in hedonic theories, which saw pursuance of maximum benefit as an essential aspect in understanding human economic behavior. Hedonic analysis had shown little success in predicting human behavior, leading many to question its viability as a reliable source for prediction.

There was also a fear among economists that the involvement of psychology in shaping economic models was inordinate and a departure from accepted principles. They feared that an increased emphasis on psychology would undermine the mathematic components of the field.

To boost the ability of economics to predict accurately, economists started looking to tangible phenomena rather than theories based on human psychology. Psychology was seen as unreliable to many of these economists as it was a new field, not regarded as sufficiently scientific. Though a number of scholars expressed concern towards the positivism within economics, models of study dependent on psychological insights became rare. Economists instead conceptualized humans as purely rational and self-interested decision makers, illustrated in the concept of homo economicus.