Unified models of human biases

Neoclassical economics has concentrated on the development of models that reflect an idealized economic agent, sometimes referred to as Homo economicus, as a way of studying economics. In the period spanning the 1970s to the 1990s, research began to emerge that suggested that people were subject to cognitive biases such as the framing effect, loss aversion, the gambler's fallacy, confirmation bias, and many others. Further, these effects could produce anomalies such as herd behavior or momentum investing inconsistent with economic models that did not incorporate human psychological limitations. While some models have begun to include bounded rationality and risk aversion, such as prospect theory, there still remains to be seen a unified model that can make useful predictions that incorporates the entirety of cognitive biases and rational limitations in most humans. Further, there even exists debate as to whether it is necessary to incorporate such psychological limitations into economic models. While some economists insist they are necessary to fully appreciate the complexity of the market, others still contend that a model that incorporates human biases is either unrealistic or question its usefulness arguing that a model that doesn't approximate agents as being perfectly rational, with the possibility of minimal exceptions, is unlikely to be successful.

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Source: List of unsolved problems in economics (CC BY-SA 4.0)