What is Nudge Theory

The expectancy theory developed in behavioral finance has led to a significant paradigm shift by incorporating cognitive factors into the financial decision-making process. Deviating from the traditional finance approach, which assumes individuals act entirely rationally in their financial decisions, behavioral finance focuses on cognitive biases within the scope of its examination. A portion of studies in behavioral finance centers on various cognitive biases that guide investor behavior in decision-making processes. In the study, starting from assertion that cognitive biases play a determining role in individuals' financial behaviors, the impact of overconfidence and optimism biases on insurance purchasing behavior is examined from a behavioral finance perspective. Practices that could ameliorate the effects of overconfidence and optimism biases on insurance purchasing decisions are analyzed within Thaler and Sunstein's Nudge theory. Based on this analysis, recommendations for implementing measures to mitigate the impact of the biases on insurance purchase decisions are provided.