Tema 5 ITA: The Relevance of Decision Making PDF

Tema 5 ITA : The relevance of decision making. DANIEL KAHNEMAN Died in March 2024 Known by: Psychology of decision making Behavioural economics Israeli psychologist. 2002 Nobel prize in Economic Sciences Behavioral economics It studies the effects of psychological, emotional, cultural...

Tema 5 ITA : The relevance of decision making. DANIEL KAHNEMAN Died in March 2024 Known by: Psychology of decision making Behavioural economics Israeli psychologist. 2002 Nobel prize in Economic Sciences Behavioral economics It studies the effects of psychological, emotional, cultural and social factors on economic agents’ decisions. In other words, behavioral economics analyses how market decisions are made, based on human behavior. Behavioral economics integrates psychology, neuroscience and microeconomics. Social sciences are human sciences after all. SYSTEM 1 (9 5 %) S Y S T E M 2. (5 %) Intuition & Instinct Rational thinking Fast Slow Automatic Effortful Associative Logical Unconscious Conscious Error prone Reliable What’s the issue? Mental laziness Using system 2 consumes more energy. Our mind tends to go for the least effort possible. We tend to make quick choices, even when we lack of information to make rational decisions. The problem comes when we overuse system 1. We kind of abuse of those quick decisions. System 1often takes over in stress situations. When the stakes are high, we need to weight the pros and cons of a decision. When making a decision, we should always focus on several factors. Most of the time we don’t do that, though. Fast thinking or system 1 is linked to HEURISTICS: Process by which humans use mental shortcuts to arrive at decisions. HEURISTICS Anchoring effects and heuristics are, of course, present when making decisions that involve money. That’s why it’s so important to know how to identify a good judgement from a bad Judgement.SOME OTHER MENTAL SHORTCUTS (HEURISTICS) Availability Substitution Optimism and loss aversion Framing effect Sunk cost fallacy OVERCONFIDENCE People often overestimate how much they understand the world and underestimate the role of chance in particular. We have an illusion of control. We seriously tend to underestimate the obstacles. ENTREPRENEURIAL DELUSIONS Evidence suggests that entrepreneurial overconfidence is widespread, stubborn…and costly. CHOICES Kahneman states that we tend to address problems in isolation. When other reference points are considered, the choice of a given reference point will have a disproportionate influence on the outcome. This also affects economic agents’ utility. LESSONS LEARNED Kahneman helps us to identify our fast and slow ways of thinking. He also helps us to apply the two systems in the right context. By understanding how our mind works we can dramatically change our thoughts and adjust our focus. When dealing with important choices, we should slow down and use our system 2 (slow thinking). To do so, we must look for evidence and weight many factors, not only the ones we’re getting the most pleasure from.