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Behavioral Economics

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Sumit Bajaj
Sumit Bajaj

Linda is 31 years old, single, outspoken and very bright. She majored in philosophy and was concerned with issues of discrimination and social justice. A sample personality test description is given for a 45-year-old man named Jack who has several hobbies and shows no interest in political or social issues. The probability he is an engineer is estimated. People are prone to rely more on initial impressions or rich details rather than rationally analyzing all available information when making decisions.

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Behavioral Economics
Linda is 31 years old, single, outspoken and very bright. She majored in philosophy. As a student, she was deeply concerned with issues of discrimination and social justice, and also participated in antinuclear demonstrations. Linda is - (a) a bank teller (b) a bank teller and active in the feminist movement
In a lake there is a patch of lily pads. Every day the patch doubles in size. If it takes 48 days for the patch to cover the entire lake, how many days would it take for the patch to cover half the lake? (a) 37 (b) 24 (c) 42 (d) 47
A town has two hospitals: one large and one small. Assuming there is an equal number of boys and girls born every year in the United States, which hospital is more likely to have close to 50 percent girls and 50 percent boys born on any given day? (a) The larger (b) The smaller (c) About the same (say, within 5% of each other)
A team of psychologists performed personality tests on 100 professionals, of which 30 were engineers and 70 were lawyers. Brief descriptions were written for each subject. The following is a sample of one of the resulting descriptions: Jack is a 45-year-old man. He is married and has four children. He is generally conservative, careful, and ambitious. He shows no interest in political and social issues and spends most of his free time on his many hobbies, which include home carpentry, sailing, and mathematics. What is the probability he is an engineer? (a) 10-40% (b) 40-60% (c) 60-80% (d) 80-100%
We like to think that we gather and analyze all available information rationally before we make a decision...
Automatic vs. The Systematic
Behavioral Economics
Behavioral Economics
In reality, we are more like this guy
Both System 1 and System 2 should be firing together for making good decisions
Behavioral Economics
Behavioral Economics
SYSTEM 1 = 24 SYSTEM 2 = 47
System 1 - Answer C, about the same System 2 - Larger Hospital We expect things to follow a proven pattern regardless of size. But size matters. A small sample size (i.e., the small hospital) will often contain extreme proportions, while a large sample size (i.e., the large hospital) will more likely reflect real-world distributions
A large percentage of people who responded to this question overestimated the likelihood that Jack was an engineer, even though mathematically, there was only a 30-in-100 chance of that being true This proclivity for attaching ourselves to rich details, especially ones that we believe are typical of a certain kind of person, it is yet another shortcoming of the hyper-efficient System 1.
Bias Blind Spot: Biases don¡¯t affect you! There are a lot of documented cognitive biases About 120 on Wikipedia¡¯s list
Behavioral Economics
Look outside the box to expand your options
Collect relevant data and analyze it properly
Reflect on any cognitive biases that may be influencing your decisions
At times you just have to go with your gut...
.

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Behavioral Economics

  • 2. Linda is 31 years old, single, outspoken and very bright. She majored in philosophy. As a student, she was deeply concerned with issues of discrimination and social justice, and also participated in antinuclear demonstrations. Linda is - (a) a bank teller (b) a bank teller and active in the feminist movement
  • 3. In a lake there is a patch of lily pads. Every day the patch doubles in size. If it takes 48 days for the patch to cover the entire lake, how many days would it take for the patch to cover half the lake? (a) 37 (b) 24 (c) 42 (d) 47
  • 4. A town has two hospitals: one large and one small. Assuming there is an equal number of boys and girls born every year in the United States, which hospital is more likely to have close to 50 percent girls and 50 percent boys born on any given day? (a) The larger (b) The smaller (c) About the same (say, within 5% of each other)
  • 5. A team of psychologists performed personality tests on 100 professionals, of which 30 were engineers and 70 were lawyers. Brief descriptions were written for each subject. The following is a sample of one of the resulting descriptions: Jack is a 45-year-old man. He is married and has four children. He is generally conservative, careful, and ambitious. He shows no interest in political and social issues and spends most of his free time on his many hobbies, which include home carpentry, sailing, and mathematics. What is the probability he is an engineer? (a) 10-40% (b) 40-60% (c) 60-80% (d) 80-100%
  • 6. We like to think that we gather and analyze all available information rationally before we make a decision...
  • 7. Automatic vs. The Systematic
  • 10. In reality, we are more like this guy
  • 11. Both System 1 and System 2 should be firing together for making good decisions
  • 14. SYSTEM 1 = 24 SYSTEM 2 = 47
  • 15. System 1 - Answer C, about the same System 2 - Larger Hospital We expect things to follow a proven pattern regardless of size. But size matters. A small sample size (i.e., the small hospital) will often contain extreme proportions, while a large sample size (i.e., the large hospital) will more likely reflect real-world distributions
  • 16. A large percentage of people who responded to this question overestimated the likelihood that Jack was an engineer, even though mathematically, there was only a 30-in-100 chance of that being true This proclivity for attaching ourselves to rich details, especially ones that we believe are typical of a certain kind of person, it is yet another shortcoming of the hyper-efficient System 1.
  • 17. Bias Blind Spot: Biases don¡¯t affect you! There are a lot of documented cognitive biases About 120 on Wikipedia¡¯s list
  • 19. Look outside the box to expand your options
  • 20. Collect relevant data and analyze it properly
  • 21. Reflect on any cognitive biases that may be influencing your decisions
  • 22. At times you just have to go with your gut...
  • 23. .