Final answer:
Economists are knowledgeable about how people respond to incentives, including both traditional economic perspectives of cost-benefit analysis and the more nuanced behavioral economics approach, which includes psychological factors in decision-making.
Step-by-step explanation:
Economists are especially skilled at understanding how people respond to incentives. This concept is central to economic reasoning, which encompasses both traditional and behavioral economics. Traditional economics posits that individuals perform a cost-benefit analysis to decide if the benefits of an action, like committing a crime, outweigh the expected costs, which include the chances of getting caught and the associated punishments.
However, behavioral economists take this a step further by considering the emotional and psychological state of individuals when making decisions. They study how emotions like revenge, optimism, or loss can affect financial decisions, and how these actions under various emotional states can be predictable. Behavioral economics thereby seeks to integrate psychological insights into economics, looking at how certain situations can make given dollar amounts mean different things to different people.
Behavioral economists also introduce concepts like 'nudges' towards more rational behavior to help counteract procrastination or temptations, such as enrolling employees in retirement savings plans by default to encourage early savings crucial for retirement. This approach recognizes that while human beings have self-control, we often put in place measures like purchasing locks for refrigerators or overpaying taxes to save money, as a way to protect ourselves from our worst temptations.