Tag Archives: Decision making

The flaws a Nobel Prize-winning economist wants you to know about yourself

BOOK REVIEW

Nudge: Improving Decisions about Health, Wealth and Happiness, Authors: Richard Thaler and Cass Sunstein.

By Eshe Nelson – Sorry to say it, but you’re not perfect. We like to believe that we are smart, rational creatures, always acting in our best interests. In fact, dominant economic theory these days often makes that assumption.

What was left of this illusion was further dismantled by the The Royal Swedish Academy of Sciences, who awarded the Nobel prize in economics to Richard Thaler, an American economist at the University of Chicago, for his pioneering work in behavioral economics, which examines humanity’s flaws—namely, why we don’t make rational economic decisions.

People can make bad economic choices based on something Thaler dubbed the “endowment effect,” which is the theory that people value things more highly when they own them. In other words, you’d ask for more money for selling something that you own than what you would be willing to pay to buy the same thing.

People experience the negative feeling of loss more strongly than they feel the positive sense of a gain of the same size. This is also impact by anchoring: If you are selling an item, your reference point is most likely to be the price you paid for something. Even if the value of that item is now demonstrably worth less, you are anchored to the purchase price, in part because you want to avoid that sense of loss.

This can lead to pain in financial markets, in particular. more> https://goo.gl/eR1B2B

Apes Make Irrational Economic Decisions – That Includes You

By Christopher Krupenye – These irrational biases are common, they’re really hard to overcome, and they have pervasive impacts on human market behavior.

For example, people are more likely to spend a sum of money when it is framed as a bonus than when it is framed as compensation for a previous loss, like a rebate, which has implications for population trends in spending versus saving.

Framing also influences people’s medical decisions, such as their tendency to undertake preventative measures in personal health care.

And it’s often leveraged by marketing agencies to improve sales.

Decision-making research can help economic institutions – built on the erroneous assumption that people will behave rationally – to account for predictable irrationality.

It can also help us to design choice environments that lead people to make decisions that are better for them. For these reasons, Daniel Kahneman [2, 3, 4] was awarded the Nobel Prize in Economics in 2002, for his contributions (with the late Amos Tversky [2, 3, 4]) to the understanding of irrational decision-making. more> http://goo.gl/q04Rve

Related>

Strategic or random? How the brain chooses

Howard Hughes Medical Institute – The brain excels at integrating information from past experiences to guide decision-making in new situations. But in certain circumstances, random behavior may be preferable. An animal might have the best chance of avoiding a predator if it moves unpredictably, for example.

When faced with a weak competitor, the animals made strategic choices based on the outcomes of previous trials. But when a sophisticated competitor made strong predictions, the rats ignored past experience and made random selections in search of a reward. more> http://tinyurl.com/knpaxcw

Why Hierarchies Must Sign Their Own Death Warrant To Survive

BOOK REVIEW

The Three Ways of Getting Things Done, Author: Gerard Fairtlough.

By Steve Denning – There are only three ways of getting things done effectively as an organization:

The book explains that “hierarchy is not necessary for discipline, for systematic ways of working, for inspiration or for leadership. The alternative to hierarchy is not chaos or anarchy. Only our powerful addiction to hierarchy, given to us by our genes and by our culture, leads us to believe this.” more> http://tinyurl.com/kjtk7ps