Most economic models assume that people make choices based on achieving the best possible economic outcome for themselves. Human behavior, however, is often not so simple. Rather than acting like economic computing machines, people often make choices that fall short—sometimes far short—of the greatest possible economic outcome, or payoff.

Why people sometimes make less-than-perfect choices is the subject of behavioral economics, a branch of economics that combines economic modeling with insights from human psychology. Behavioral economics grew out of economists’ and psychologists’ attempts to understand how people actually make—instead of theoretically make—economic choices.

It’s well documented that people consistently engage in irrational behavior, choosing an option that leaves them worse off than other available options. Yet, as we’ll soon learn, sometimes it’s entirely rational for people to make a choice that is different from the one that generates the highest possible profit for themselves. For example, Ashley may decide to earn a teaching degree because she enjoys teaching more than advertising, even though the profit from the teaching degree is less than that from continuing with advertising.

The study of irrational economic behavior was largely pioneered by Daniel Kahneman and Amos Tversky. Kahneman won the 2002 Nobel Prize in economics for his work integrating insights from the psychology of human judgment and decision making into economics. Their work and the insights of others into why people often behave irrationally are having a significant influence on how economists analyze financial markets, labor markets, and other economic concerns.