Behavioral Economics: How and Why We Make Decisions

by Chauncey Glenn

The Fundamentals of Thought
Ample information is not always available to individuals in the face of making optimal and self-interested decisions. Contrarily and with the vast amount of information available to individuals today, information overload can similarly lead to decision dilemmas. Consequentially, individuals become prone to error and inoperative thinking. Psychological assessments and research concerning decision-making processes show that our thoughts form in two ways. The first way that our thoughts form is quickly. It’s referred to as System 1 thinking. This mode of thought makes decisions based on intuition, emotion, skill, and experience. The second way that our thoughts form is reasonable. This system’s referred to as System 2. This mode of thought constructs judgments based on effortful deliberation and computation, consuming a lot of energy and effort (Kahneman, 2003). Which system do you use more? Probably System 1.

Flawed Thought Processes: Heuristics and Accessibility
Under certain circumstances, thought comes to mind spontaneously. The spontaneity, inaccessibility, and systematic error observed in decision-making or thinking are referred to as cognitive bias. Cognitive bias — occurring when individuals have to process and interpret information from the environment around them — yields divergences between rational and utility-maximizing choices. As a result of this inherently flawed nature, a reality where we hate to lose, the propensity to be influenced by contextual information, and our practice of selective attention, choice and thought proves to be challenging. Indeed, the list of cognitive biases that plaugue us is long.

What is Behavioral Economics?
Behavioral Economics is a method of economic analysis that applies psychological insights into human behavior to explain decision-making, judgment, and choice. In simpler terms, behavioral economics combines elements of economics and psychology to understand how and why people behave the way they do. Behavioral Economics is the demonstration of bias in decision-making. It creates new and implements existing interventions (nudges) that concentrate on modifying the behaviors of individuals in ways that are ethical, ideally. Behavioral Economists explore many of the non-rational and social factors that influence decision-making. In Behavioral Economics, irrationality and its effect are emphasized and studied concerning a wide array of behaviors.

How is Behavioral Economics Different?
Behavioral Economics differs from traditional economics, which assumes that most people have well-defined preferences and abundant information available to make optimal self-interested decisions based on those preferences. It differs from the therapy sector in that practitioners offering therapy explore more than cognitive bias to discuss and delve into trauma and the personal history driving bias. Furthermore, therapists use therapeutic models and strategies to address emotions and habits while focusing on specific behaviors.

The Limitations of Behavioral Economics
While Behavioral Economics and its interventions intend to leverage the very continuum that is accessibility to alleviate cognitive bias and facilitate more suitable behavior and choice-making, it can cause Economists to view behavior through a skewed and ironically biased lens. While prolonged practice can improve the intuitive thinking capacity of humans, Behavioral Economics implies that human beings are incapable of making decisions that are fundamentally good without interference. Furthermore, research published in the field may lack the perspectives or insights from non-English speaking communities.

Closing Remarks
Through dismantling cognitive bias and manipulating the environments in which human beings make decisions, Behavioral Economics and its interventions leverage the continuum that is accessibility by aiding the individual to practice more deliberate thought and choice-making. With assistance (nudges), intuitive thinking can improve. Still, Behavioral Economics has not advanced since founding fathers Daniel Kahneman, Amos Tversky, Thaler Sunstein, and the now infamous Dan Ariely made waves. While Behavioral Economists explore many of the non-rational and social factors that influence decision-making, some contemporaries even believe it may be time to move on from psychology and infuse the fundamentals of neuroscience to further inform the economy of behavior (Ramsøy, 2018).

*References available upon request.