Isolation levels are settings in database management systems that define how transaction integrity is visible to other transactions. They help manage the trade-off between data consistency and system performance. The four main isolation levels are Read Uncommitted, Read Committed, Repeatable Read, and Serializable, each offering different levels of protection against phenomena like dirty reads, non-repeatable reads, and phantom reads. Choosing the right isolation level is crucial for applications, as it affects how transactions interact. For example, Read Uncommitted allows the highest level of concurrency but risks reading uncommitted changes, while Serializable ensures complete isolation but can lead to reduced performance due to increased locking.