Title: Mcgowanjm Wire 2012 Source:
[None] URL Source:[None] Published:Feb 26, 2012 Author:Various Post Date:2012-02-26 09:15:13 by A K A Stone Keywords:None Views:1372252 Comments:2390
people tend to overweight small probability events.
So, what is behavioural economics?
Well, behavioural economics recognises the limits of human rationality, with ‘rationality’ being defined by the mainstream economic sense of the word, and comprises of a number of observations appertaining to human decision making that do not sit well with the neoclassical orthodoxy (Dolan et al. 2010). These include:
the observation that losses loom substantially larger than gains, a phenomenon known as loss aversion;
(ii) that reference points matter, such that people often care more about what they gain or lose around what they already have, rather than what they end up with;
(iii) that people tend to overweight small probabilities;
(iv) that people allocate their money to discrete bundles, so that the value that they attach to a particular amount of money will be contextual;
(v) the observation of motivational crowding, such that offering money to people to do something has been shown often to ‘crowd-out’ their intrinsic, altruistic motivation to do that very thing; and
(vi) ‘hyperbolic discounting’, which is the observation that people tend to place an enormous weight on the ‘immediate’ compared to the future, living for today at the expense of tomorrow.
In addition to the above stated observations, individuals often seemingly adopt a number of rules of thumb (or ‘heuristics’) when reaching their decisions, and apparently ‘satisfice’ rather than ‘optimise’, which goes against the grain of mainstream economics.
A far from exhaustive list of these rules of thumb include:
(a) the availability heuristic, in which people tend to assess the probability of an event by the ease with which similar instances can be brought to mind (e.g. many people erroneously think that the annual death rate from shark attacks is greater than that caused by falling coconuts);
(b) the anchoring heuristic, in which individuals often unconsciously focus upon, and can be manipulated by, entirely irrelevant cues when making decisions, and
(c) the overconfidence bias (e.g. most people think their driving ability is better than average), which has obvious implications for choices in financial markets, and elsewhere.
Behavioural economists have thus uncovered a library of systematic preference patterns and heuristics that cannot be explained by standard economic theory. Interestingly, although perhaps for many, on reflection, unsurprisingly, several of the observations and rules of thumb (e.g. the importance of reference points, availability, anchoring)
appear to suggest that humans are influenced very much by prominent, or ‘salient’, attributes in choice options – once their attention is focussed (sic) upon a particular feature of a task, they tend to overlook somewhat other potentially important information (for an entertaining example of this phenomenon, see selective attention test).
