Final answer:
Behavioral economists have found that the concept of 'loss aversion' explains why individuals may behave 'irrationally' in economic situations, reacting more strongly to losses than gains, which challenges traditional economic models of rationality.
Step-by-step explanation:
Behavioral economics challenges the assumption that individuals always make rational economic decisions. Mainstream economists suggest that knowing more economics reduces irrational behaviors. However, behavioral economists such as Daniel Kahneman and Amos Tversky have highlighted through their research the concept of loss aversion. They found that individuals experience a $1 loss as being more painful than the benefit of a $1 gain, approximately 2.25 times more painful, to be precise. This suggests that emotions play a significant role in decision-making, often leading to decisions that deviate from what is traditionally considered 'rational' economic behavior. This has important implications for the financial behaviors of individuals, particularly in domains such as investing where reactions to losses can disproportionately affect decision-making.