Making sense of irrationality
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This document summarizes some key concepts from behavioral economics. It introduces the concepts of "Homo Economicus" which assumes people are perfectly rational, and "Homo Sapiens" which recognizes people sometimes and even always make irrational decisions. It discusses the work of Amos Tversky and Daniel Kahneman who founded behavioral economics and experiments showing people rely on heuristics and face biases. Examples of heuristics discussed include availability heuristic and representative heuristic. Mental accounting and sunk costs are also summarized.
Making sense of irrationality
- 1. Making Sense of Irrationality! Opening the Black Box By: Humayun Khan
- 2. Who is this Homo Economicus? Supremely RATIONAL Examines Evidence Conducts a cost/benefit analysis before making a decision
- 3. Introducing Homo Sapiens ≒Homo Economicus model not disproved because we SOMETIMES make mistakes. The proof lies in that in certain circumstances, we ALWAYS make mistakes.
- 4. Amos Tversky& Daniel Kahneman The Founders of Behavioural Economics
- 5. Question A bat and ball cost $1.10 in total. The bat costs $1 more than the ball. How much does the ball cost?
- 6. Two Modes of Thinking I feel it in my GUT! Vs. Use your HEAD!
- 7. Key Points to Take Away Representative Heuristic or The Rule of Typical Things Availability Heuristic or The Example Rule Mental Accounting Sunk Costs
- 8. Read This! Linda is a 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 anti-nuclear demonstrations
- 9. Ask yourselves How likely is it that she is: A) Bank Teller B) Bank Teller active in the Feminist Movement
- 10. How it works If it looks like one, than it is one This heuristic uses past learning to make decisions in the present, and predict the future, in the face of illogical thinking.
- 11. Ask yourselves Which one causes more deaths? a) Smoking b) H1N1
- 12. Are you more likely to be killed by? a) b)
- 13. 30% more likely to be killed by falling Airplane Parts Forget JAWS, think more RUDDER
- 14. How it works When people are asked to judge how frequently something occur, people consult their memories for examples The easier it is for you find an example of an event, the MORE LIKELY or FREQUENT you think it is
- 15. Why cant you get a cab on a rainy day?
- 16. What to do with all that birthday money? Pay rent, phone bill, utilities bill, cable billNAWWWWWW How about alcohol, ipod, itouch, laptop, blackberry, or some new clothesSOUNDS MORE LIKE IT
- 17. How it works The concept of mental accounting states, that the source of the money affects how it is spent. Pay Check OSAP Scholarship Gift Money So, when the cab driver makes his daily amount in a few hours, he closes the mental account and goes home, rather then work his shift and make extra money
- 18. Imagine You arrive at a theatre and discover that you lost your ticket. Would you pay another $10 to buy another ticket?
- 19. Now, Imagine You are going to the play but havent bought your ticket in advance. When you arrive at the theatre you realize you have lost a $10 bill. Would you still buy a ticket?
- 20. Sunk Costs Costs that have already been incurred and which cannot be recovered to any significant degree
- 21. Thats All for Now I hope you now know or at least have started to wonder about, why we dont make sense (all the time, that is).
- 22. References: Kahneman, Daniel, Paul Slovic, and Amos Tversky. Judgment Under Uncertainty: Heuristics and Biases. Cambridge, UK: Cambridge University Press, 1982. Gardner, Dan. Risk: Why we fear the things we shouldnt and put ourselves in greater danger. Toronto, Ontario: McClelland & Steward Ltd., 2008