Behavioral economics - Deepstash

Behavioral economics

It is a field of study bringing together knowledge from psychology and economics to reveal how real people behave in the real world.

  • This is in contrast to the traditional economic view of human behavior, which assumed people always behave in accordance with rational, stable interests.
  •  The field largely began in the 1960s and 1970s with the work of psychologists Amos Tversky and Daniel Kahneman.
  • Behavioral economics posits that people often make decisions and judgments under uncertainty using imperfect heuristics.

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MORE IDEAS FROM The Availability Bias: How to Overcome a Common Cognitive Distortion

 We tend to judge the likelihood and significance of things based on how easily they come to mind. The more “available” a piece of information is to us, the more important it seems

The result is that we give greater weight to information we learned recently because a news article you read last night comes to mind easier than a science class you took years ago. We also give greater weight to information that is shocking or unusual. Shark attacks and plane crashes strike us more than accidental drowning or car accidents, so we overestimate their odds.

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  • Always consider base rates when making judgments about probability.
  • Whenever possible, base your judgments on trends and patterns—the longer term, the better.
  • Take the time to think before making a judgment. Stop and go through the relevant information, rather than assuming whatever comes to mind first is correct.
  • Don’t rely on memory. Keep track of information you might need to use in a judgment far off in the future.
  • Go back and revisit old information.

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William James

“The attention which we lend to an experience is proportional to its vivid or interesting character, and it is a notorious fact that what interests us most vividly at the time is, other things equal, what we remember best.”

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There is no real link between how memorable something is and how likely it is to happen. In fact, the opposite is often true. Unusual events stand out more and receive more attention than commonplace ones. As a result, the availability heuristic skews our perception of risks in two key ways:

We overestimate the likelihood of unlikely events. And we underestimate the likelihood of likely events.

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There’s a reason why cultures around the world teach important life lessons and values through fables, fairy tales, myths, proverbs, and stories.

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Scenario Planning

Managers who can expand their imaginations to see a wider range of possible futures will be much better positioned to take advantage of the unexpected opportunities that appear.

By identifying basic trends and uncertainties, a manager can construct a series of scenarios that will help to compensate for decision-making errors from overconfidence and tunnel vision. That’s what scenario planning does. 

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We surround ourselves with it: We tend to like people who think like us; if we agree with someone's beliefs, we're more likely to be friends with them.

This makes sense, but it means that we subconsciously begin to ignore or dismiss anything that threatens our world views

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