Learn more about leadershipandmanagement with this collection
How to make rational decisions
The role of biases in decision-making
The impact of social norms on decision-making
In an ideal world, our decisions would be the result of a careful weighing of costs and benefits and informed by existing preferences. We would always make optimal decisions.
The theory of rational choice assumes that human actors have stable preferences and engage in maximizing behavior.
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Bounded rationality is a term associated with Herbert Simon’s work of the 1950s. According to this view, our minds must be understood relative to the environment in which they evolved. There are restrictions to human information processing, due to limits in knowledge and computa...
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Time inconsistency also occurs when our present self fails to predict accurately the preferences of our future self, a point illustrated well by diversification bias.
When shopping for multiple future consumption episodes, I may choose the variety pack of cereal, only ...
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Present events are weighted more heavily than future ones; for example, many people prefer to receive £100 now over £110 in a month’s time.
Discounting is non-linear, and its rate is not constant over time. People’s preference for receiving £100 a week...
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Information avoidance in behavioral economics refers to situations in which people choose not to obtain knowledge that is freely available.
Active information avoidance includes physical avoidance, inattention, the biased interpretation of information (see also confirmati...
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Humans’ bounded rationality is particularly well illustrated by the concept of choice overload. This phenomenon occurs as a result of too many choices being available to consumers.
Overchoice has been associated with unhappiness, decision fatigue, going with the default option, as ...
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BE uses psychological experimentation to develop theories about human decision-making and has identified a range of biases as a result of the way people think and feel.
BE is trying to change the way economists think about people’s perceptions of value and expressed prefere...
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Experience, good information, and prompt feedback are key factors that enable people to make good decisions.
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Our willingness to take risks is influenced by the way in which choices are framed, i.e. it is context-dependent.
Amos Tversky and Daniel Kahneman are perhaps best known for the development of prospect theory and published a number of papers that show that decisions are not always opt...
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Daniel Kahneman uses a dual-system theoretical framework to explain why our judgments and decisions often do not conform to formal notions of rationality.
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When we make plans for the future, we are often too optimistic.
For example, we are subject to committing the planning fallacy by underestimating how long it will take us to complete a task and ignoring past experience. Similarly, when we try to predict how we will fee...
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The economist Richard Thaler coined the concept of mental accounting. According to Thaler:
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It is a field of study bringing together knowledge from psychology and economics to reveal how real people behave in the real world.
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