Decisions Have An Opportunity Cost That Require Tradeoffs

Behavioral Economics: Better than a Psychiatrist

Dec 3, 2012 • 331 Views

After reading Murder at the Margin, some of my students suggested in essays that we do not need a psychiatrist to explain human behavior. Instead, just ask a behavioral economist. Let’s give it a try…

Defaulting:

  • In life, we tend to take the default selection. So whether downloading software or selecting a spouse, be sure the default is best for you. And if you are the producer, know that a default will shape the response for your good or service.

Framing:

  • Be aware that what precedes a decision shapes its content. If a gallon of gas has gone down from $5.00 to 4.00 to $3.50, we are pleased with $3.50. However, when prices climb to $3.50, it sounds high. Similarly, told before a serious operation that 90 people out of 100 survive, most feel optimistic. Framed instead by the fact that 10 people out of 100 die, the prognosis alarms doctors and patients.

Automatic decisions:

  • Watch out for your automatic/nonthinking response. Making a decision, people typically have an instantaneous automatic response and one that involves more thinking. So, when faced with a “stop sign” that says, “go,” at first we stop although the sign instructs the opposite. With product design also, our automatic response counts. Take, for example, stovetop knob design. Shown by the first diagram below, many stovetops have a knob line-up that prevents us from responding automatically. The second diagram, below, represents a more functional design.


Our Bottom Line: Because incentives that are not always rational shape how we act at home, at work, and in response to government, behavioral economists can do a good job of explaining life and suggesting how to design policy.

Sources: For further behavioral economics insight, I not only recommend the source of all of my above examples, Nudge by Richard Thaler and Cass Sunstein, but also Thinking, Fast and Slow by Daniel Kahneman, Predictably Irrational by Dan Ariely and Wait by Frank Partnoy. For a more academic look at the connection between incentives and behavior, this paper provides insight. And here, you can read more about Murder at the Margin, a mystery whose protagonist is an economics professor who solves a murder using  behavioral economics.

Stove top knob line-ups: In the bottom diagram, you can match the knob to the burner automatically but not with the first one.

Knob alignment does not imply which knob to use.

Knob alignment suggests which one to use.

 

Monday Behavioral Economics Posts

 

« »