Which theory explains how people's choices can be influenced by psychological factors?

The theory that explains how psychological factors influence people’s choices is behavioral economics.

Behavioral economics combines economic analysis with insights from psychology. It studies how people actually decide rather than assuming that every person has complete information, unlimited time, stable preferences, and perfect ability to calculate the best option. Researchers examine predictable influences such as loss aversion, framing, overconfidence, present bias, and the use of mental shortcuts called heuristics.

The field grew rapidly through work by Daniel Kahneman and Amos Tversky, whose research on judgment and decision-making challenged strict models of rational choice. Richard Thaler extended these ideas into economics, including the concept of mental accounting and the idea of “nudges”—changes to how choices are presented that can influence behavior without eliminating options.

Behavioral economics is not the claim that people are simply irrational. Its key point is that departures from traditional rational-choice assumptions can be systematic and measurable. Institutional economics instead focuses on rules and organizations, game theory analyzes strategic interaction, and rational choice theory models deliberate utility-maximizing behavior. These approaches can overlap, but behavioral economics is the answer most directly tied to psychological influences on choice.