The Psychology and Economics of Choice: Decision-Making Biases, Heuristics, And Behavioural Interventions

Human decision-making occupies a complex intersection between economic rationality and psychological reality. Classical economic theory posits that individuals select among alternatives in a manner that maximises utility; however, behavioural research consistently demonstrates that real-world choices are shaped by cognitive biases, emotional states, social influences, and the architecture of the choice environment. This paper examines the theoretical and empirical foundations of the psychology and economics of choice, with the objective of providing a comprehensive account of why individuals systematically deviate from purely rational behaviour. Drawing on Herbert Simon's concept of bounded rationality, Kahneman and Tversky's Prospect Theory, heuristic-based decision models, and Thaler and Sunstein's nudge theory, the study analyses the mechanisms through which deviations from rational choice can be predicted and, where appropriate, corrected. Key cognitive biases reviewed include anchoring, framing effects, loss aversion, the halo effect, the endowment effect, hyperbolic discounting, the decoy effect, confirmation bias, status quo bias, the bandwagon effect, availability bias, and overconfidence bias. The study further explores the paradox of choice—the counterintuitive finding that an excess of options diminishes rather than enhances decision satisfaction—and the practical applications of nudge theory across public health, personal finance, and public administration. The results of this conceptual analysis indicate that individual decision-making is not a product of deliberate rational computation but rather the outcome of a dynamic interaction between cognitive limitations, emotional states, and environmental framing. By integrating insights from behavioural economics and cognitive psychology, this paper argues that thoughtfully designed choice environments can guide individuals toward welfare-enhancing outcomes without undermining personal autonomy.