We are not rational actors
Classical economics assumed people make financial decisions by rationally calculating costs and benefits. Behavioural economics — pioneered by Daniel Kahneman, Amos Tversky and Richard Thaler — has comprehensively demonstrated this is not how most people actually behave.
Loss aversion
The most influential finding is loss aversion: the psychological pain of losing £100 is roughly twice as intense as the pleasure of gaining £100. This causes us to hold losing stocks too long (not wanting to realise the loss) and sell winning stocks too early.
Present bias
We systematically overvalue things available to us now relative to things available in the future. This is why we say we will start saving next month, next quarter, next year — and then find reasons to delay. It is why pension auto-enrolment works: it exploits present bias by making inaction mean saving rather than not saving.
Mental accounting
We treat money differently depending on where it comes from or where it is held. A tax rebate feels like a windfall to be spent; the same amount from salary feels like it should be managed carefully. Understanding these mental shortcuts helps you design systems to work with them.