Behavioral economics challenges the traditional economic assumption that individuals are 'rational actors' who always make decisions that maximize their own utility. Instead, behavioral economists use psychological insights to show that human decision-making is often influenced by cognitive biases and heuristics—mental shortcuts that can lead to systematic errors. One such bias is 'loss aversion,' the tendency for people to feel the pain of a loss more acutely than the pleasure of an equivalent gain. This can lead to irrational behavior, such as holding onto a declining investment for too long to avoid realizing a loss. Another concept is 'anchoring,' where individuals rely too heavily on the first piece of information they receive when making a judgment. For instance, an initial high price for a product can make a subsequent slightly lower price seem like a bargain, even if it is still objectively high. These insights have significant implications for public policy. 'Nudge theory' suggests that by subtly changing the 'choice architecture'—the way options are presented—governments can encourage people to make better decisions, such as saving more for retirement, without restricting their freedom of choice.