hide

Read Next

Podcast Interview: Jim Hopkinson of WIRED

Daniel Odio gives tips and tricks for entrepreneurs!

Click to listen to "Episode 65: Interview Part 1" and click to listen to "Episode 66: Interview Part 2"

Jim Hopkinson, Wired.com's Marketing Guy and creator ofThe Hopkinson Report, recently interviewed me for his Hopkinson Report podcast. Here's a Tweet of Jim's about the Podcast, and another one about my social media hardware bag and another on my blog posting about how to hire people effectively.

Here is a transcript of the Podcasts

So what is it all about?

On Decisions

I will try to give a short summary and introduction to the filed of Behavioral Economics in this post. Obviously such an interesting topic can't be introduced properly in one blog post, but I will try to provide links to other websites where the interested readers can find more about this field.

The Behavioral Economics is the field of studying the effects of social and psychological (cognitive and emotional) factors on the decisions the agents take in the context of economics.

According to classical economics, the agents are fully rational individuals (or organizations) that are able to: have clear understanding of what they want and prefer, collect every little detail and information required for decision making, analyze all the data in a rational manner, reach to an optimum conclusion and finally act accordingly by choosing the best option and making the optimum decision that is the most appropriate answer to the problem. It's needless to say that everyone of us have faced with situations where some or all of these presumptions have been violated. To show an example, consider the situation where someone wants to purchase a TV. If we were to accept the fully unbounded rationality, then the person should first of all totally understand why he needs to buy the new TV and what are his preferences and expectations, then collect information regarding every possible option (models of TVs) from price details in different stores to electricity consumption, guarantee conditions, screen size and resolution details, technological details, etc. In the next step, he should find a way to analyze all of the details and every piece of information to reach to a ranking where each TV model is ranked compared to others based on those details. And finally he would act on this ranking and buy the best possible option, the one which he will not regret after a period of time. It should be also noted that the person's decision will not be affected by any factor that doesn't directly influence the TV performance or cost. Now, if this individual wants to follow this process, it might take him a long time to make his decision. Many of us will not take all these steps, we might make some shortcuts like eliminating some brands, we might make our decision based on reviews and recommendations of others rather than our own research, our decision might be influenced by advertisement or even the way and order that TVs have been put on display in a shop (an interesting topic in decision making science which will be discussed in more detail during later posts), or it might be influenced by our mood or the sales pitch of the salesperson . We might purchase some TV with 3D function although we know that we will use this function very rarely, etc. In the end this decision might differ from what the fully rational model has suggested, and we may regret it after a few weeks. Note that this process was just for a comparably simple and unimportant purchase decision, if the person wanted to purchase something more expensive like a house or car, or something with more financial consequences such as insurance, stock or bonds then the process would have taken much longer with many more options and features to consider. Also even the thought of going through such process for every economical decision that we made everyday is mind blowing! So there should be no wonder that we use shortcuts (heuristics) in our decision makings. Our brains are not designed to undertake such detail process like a computer. Our ancestors weren't making such thoughtful decisions when they were being attacked by wild animals, cause if they were going to analyze every option they had in that moment, they would have been ended up dead and we wouldn't been here! The psychologists have introduced two different systems of thinking in humans, named Dual Process. There are many different names for each system but I will use more generic titles. System 1 is unconscious reasoning, quick process, more intuitive, influenced by emotions and experience. On the other hand System 2 is based on conscious and logical reasoning, it is effortful and explicit, slow process, influenced by facts and logic. System 1 is common among humans and animals, it is responsible for quick decisions and reactions, while system 2 is comparably new (probably only a few thousand years old) and can be developed by humans over time. People can work on improving the system 2 thinking, for examples experts tend to make quicker and better decisions in their fields compared to novice people. These two systems frequently work together, for example in some cases initial reaction of system 1 might be modified by system 2, but in many cases the adjustment provided by system 2 is not sufficient to avoid making mistakes by system 1. Going back to our example, we might have been able to produce a list of all TV models with related important factors that will effect our decision and came to a conclusion regarding which model we want to purchase. We enter the shop to buy that particular model and see that they show a movie on the selected TV in the display, and as we didn't like that movie when we saw it a few years ago, it affects our decision and we buy another model! In this instance the system 1 which is being influenced by the memories and emotions causes an unconscious dislike regarding that TV model just because some movie that we didn't like was being shown on it! There is no concrete logic in changing our decision, and there is clearly no connection between that TV model and the video being shown but then again we are not super rational people. Or we might be influenced by some other unimportant factors such as the boxing of the TV! We get influenced much easily by factors not related to performance and cost and we change our decisions. I will provide more examples in later posts where there are conflicts between systems of thinking and where we fail to make the correct decisions.

Rendering New Theme...