Heads Up Money by DK

Author:DK
Language: eng
Format: epub, pdf
ISBN: 9781465465849
Publisher: DK Publishing

Get real

Simon’s work showed the links between economics and psychology, and two psychologists, Daniel Kahneman and Amos Tversky, developed the ideas further. Their studies were originally about decision-making in general, but are particularly relevant to the way we make economic decisions. Like Simon, they found that we tend to base our decisions on incomplete information, such as our personal experience or something we’ve heard about, rather than examining all the options. Because we want to make decisions quickly without thinking too deeply, we often make false assumptions or act on intuition, hunches, or what we would like to be the case. And sometimes, our thinking is just wrong. An example is the “gambler’s fallacy”: if you toss a coin and it comes up tails 10 times in a row, many people think that it’s more likely to be heads next time, but in fact the odds are still 50:50 no matter what’s happened in the past. And with a little thought, we would know that this is true. Kahneman explains that we can think rationally, but it’s quicker and easier to make decisions intuitively or emotionally. From this research into behavioral economics, economists are coming to realize that theories based on the perfectly rational behavior of “economic man” and the calculations and computer modeling of economic analysts may not give an entirely true picture of how economies work in the real world.

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