Research has shown that people have a hard time making correct decisions (being

Question

Research has shown that people have a hard time making correct decisions (being rational) on even simple things.  

a) What’s going on in the brain?

What are Heuristics as discussed in this course? Give some examples discussing how they work and how they lead us astray.

Why is the systematic incorrectness of heuristics interesting to economists?  

If people cannot easily be rational, how can we perhaps, ‘nudge’ them into the right behavior, without big,   intrusive government policies? Give examples.

Explanation / Answer

a) According to the latest findings in neuroscience, decision making is not only logical, it is emotional also. A neuroscientist Antonio Damasio studied people with damaged area of brain that regulates emotions and found that they seemed normal, except that they were not able to feel emotions and were not able to make decisions even the simple one for example what to eat. At the point of decision emotions are very important. Researchers found that people who try to make decisions only by logics rely on assumptions, guesses and options. They opt negotiation strategy while decision making but for others it can be other way around. Both emotions and logic farm powerful pair for decision making, considering others’ feelings, need and effect of decision along with being logical can help us to arrive at good decision. Because emotions generates feeling in person that effect actions and then help in decisions making. Therefore there should be a rule of balance between two.

Heuristics is an approach to problem solving, decision making, and learning that comes from previous experiences of similar problems. Heuristic methods can be used to speed up the process of finding satisfactory solution. In these methods person uses rule of thumb, intuitive judgments, guess, common sense, stereotyping and profiling and that can lead decision away from correct path or direction. For example, reading English word with similar appearance or similar letters. Other is reservation in employment; person doesn’t apply for a job because of limited vacancies and reservation in that job. Systematic incorrectness of heuristics is always interesting to the economists because as we know in heuristics we make quick decisions or find shortcuts to find suitable solutions based on judgment or past experiences or common sense and if we opt systematic approach while being quick it can give us interesting results. In case of economists, there is risk judgment, which can be incorrect at that time but can be beneficial later in future.

Yes, people cannot easily be rational, how can we perhaps, ‘nudge’ them into the right behavior, without big, intrusive government policies. As discussed earlier decisions are best made with the pairing of emotions and logics. Researches proved that emotional intelligence is very important while making decisions therefore people those are less in rational approach but good in emotional approach can have good decision making. For example; a student make decision about his career choice by considering his interest or what makes him/her feel good can help him/her to be successful in his professional life.

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