Every day each of us makes innumerable decisions as we go through our daily lives driving, responding to emails, talking with friends. We have to constantly decide how to respond to new situations and, frankly, most of the time our decisions are very good.
Understanding why people make the decisions
Think about how many times you’ve avoided accidents while driving or how many times you’ve had conversations where you didn’t say the wrong thing. We are all very good decision-makers in most real-world situations. But why do some sorts of decisions seem so difficult?
Why do intelligent competent people find decisions about their investments or their healthcare so challenging? And, most importantly, how can we improve the decisions that we make? Understanding why people make the decisions they do is the core goal of a new field of behavioral economics.
The challenges of decision-making
Consider these three real-world illustrations of why studying decision-making can be so challenging:
Imagine a cancer patient who was given the choice between two surgical treatments: each treatment has a same chance of curing the patient’s cancer
in fact the only difference is that some of the patients who might die from the first surgery would survive the second surgery, but would have severe but manageable complications. Most patients in the situation however choose the first surgery with a higher chance of death. Why is that?
Now consider a second scenario. A central concept in economics is that incentives matter. People will purchase more a product when its price decreases they will work harder when they are paid more money. But in some cases incentives actually backfire as Blood Drive organizers have discovered. In many cases offering people monetary payment for each pint of blood donated actually decreases their willingness to donate. Why would paying people to donate blood discourage them from donating?
Or consider this situation. Three Olympic medalist walked to the metal stand. They are the very top and there entire world and their sport. When they step on the podium the gold medalist turns around and beams and try. The third-place bronze medalist smiles broadly. But the second place silver medalist manages only a weak smile and has disappointed eyes.
Event after event the same pattern occurs. The gold and bronze medalist are ecstatic while the silver medalists are dejected. There’s a paradox here. Everyone would agree that a silver metal is better than a bronze medal. So why is the bronze medalist happier?
Intuition is usually a very poor guide
Each of these examples runs counter to our intuitions. We should choose a surgical treatment because it leads to better outcomes not worse outcomes. Monetary incentives should make us more likely not less likely to support something in doing better in sports, work or our personal lives should make us happier than doing less well.
Intuition, it turns out, is usually a very poor guide for understanding real-world behavior. Over the coming lectures will consider these and many other examples in which people behave in ways that just don’t make sense. At least the first. But as we dig deeper and look more closely at people’s behavior you’ll start to see common features of decision-making.
They seem like mistakes but they were occur over and over in a range of different settings. Examining behavior provides you with clues about the processes of decision-making and as you better understand behavior then your intuitions will start to change.