Maps Of Bounded Rationality : Psychology For Behavioural Economics

Most of us have to make decisions from the time we wake up until the time we go to bed at night. Answering questions like what should I eat for breakfast, can I make that yellow light and should I go to the gym or go out for pizza all require us to make a choice or a decision (Robbins, S.P., Judge, T.A., 2009). At work I am challenged with collaborating with managers and other leaders to make decisions based on scenarios and events that occur in the hospital.

Unlike linear thinking, non-linear thinking is never tied to a pattern based upon prior experiences; however, non-linear thinking strengthens are experience and expertise the sub consciousness or unconsciousness uses during the thin-slicing process. Non-linear thinking often relates to uncertainty and the ability to have multiple outcomes. The non-linear framework accepts uncertainty and complexity as natural elements. The characteristics of a non-linear system can be describes as interdependent and non-proportional (Gingrich, 1998, pp. 72-73).

This paper will cover two criminological theories and they will be applied to two types of criminality. The two theories chosen for the paper were developmental theory and rational choice theory. The two types of crimes that were chosen were organized crime, specifically focusing on gangs, and terrorism. Then the crimes will be compared and contrasted. Finally, the developmental theory will be applied to organized crime to explain why and how it happens. The rational choice theory will be applied to terrorism to explain what compels individuals to attempt this form of criminality.

Carla had received very low annual return from her investment portfolio comprising of stocks of five companies for two years. Her decision to continue holding the same portfolio of assets will be an example of:

Kahneman argues that the illusion of validity comes from fast thinking because it is “prone to doubt.” Meaning, people naturally think quickly because they need a reason and so they do not have time to question their explanation. However, Kahneman neglects to mention that fast thinking roots itself in the fear of uncertainty. Kahneman begins his essay by describing his experience in evaluating

In today’s economy, decision-making skills vary for each household; however, the bottom-line goal for every individual is to get the most for their money. In order to do this, there are 4 principles of individual decision-making: facing trade-offs, evaluating what one is giving up to obtain their goal, thinking at the margin, and responding to incentives.

Economists have often modelled human decision makers as completely rational. According to this model, rational people know their own preferences, gather and accurately process all relevant information, and then make rational choices that advance their own interests. However, Herbert Simon won a Nobel Prize in economics by pointing out that people are rational, but only boundedly so in that they seldom gather all available information, they often do not accurately process the information

He thought, “why I loved one girl but not another, why my daily routine was comfortable for the physicians but not for me” (xiii). These irrational thoughts running through his mind led to a greater understanding of the economics behind making predictable choices/decisions. Furthermore, Ariely wrote this book in order to prove the idea that the “rational” choices we make on an everyday basis are actually “predictably irrational”. The discipline that allows Ariely to challenge the way we think is called “behavioral economics.” According to Ariely the latter, “draws on aspects of both psychology and economics” (xviii). Ariely accumulated a fascination for behavioral economics. He said, “I became engrossed with the idea that we repeatedly and predictably make the wrong decisions in many aspects of our lives and that research could help change some of these patterns” Through this quote, we begin to review Ariely’s economic journey through various psychological experiments that tested the decision-making process of many young

As a result, individual expectations, experiences, and biases may influence the way that people view probability of financial events or failures. It is possible to understand that human thinking is impacted by the most important things in life for a person. Fear

Rational choice theory accepts that all individuals attempt to effectively expand their preference in any circumstance and in this way reliably attempt to minimize their misfortunes. The hypothesis depends on the possibility that all people construct their choices in light of sound figuring’s, act with discernment when picking, and intend to increment either delight or benefit. Rational choice theory likewise stipulates that all unpredictable social wonders are driven by individual human activities. Accordingly, if a business analyst needs to clarify social change or the activities of social organizations, he needs to take a look at the balanced choices of the people that make up the entirety.

Prospect theory is an important alternative descriptive theory for decision-making under unreliable situation (Kahneman and Tversky 1979), which includes real life selection and psychological analysis between choices that involve risk. Prospect theory, which efforts to explain individual make decisions between risky replacements based on the value of potential gains and losses (Wakker 2010), advanced from expected utility theory, which explains that investors want to maximize expected utility of wealth when unclearly situations (Blavatskyy 2007). According to Kahneman and Tversky (1992), more recent researches perceived nonlinear preferences in choices that do not involve definite events in prospective theory. The concept of framing effect refers description invariances (Kahneman and Tversky 1992). To be specific, individual always makes the same decision in identical choice conditions. Also, decision makers have tendency to

Kahneman described the human mind as a cognitive machine, consisting of two systems. He adopted terms from Keith Stanovich and Richard West (2000). System 1 operates quickly, automatically and effortlessly with no sense of voluntary control. System 2 distributes attention to the demanding effortful mental activities, including complex thinking and computation. More control and concentration are required for system 2 to operate. Though normally, system 2, the rational system, are in control of our judgements, under certain circumstances, system 1 takes over and guide the former one without our

The book starts by clarifying the two fundamental modes of thought: ‘system-1 (the fast thinking system) and ‘system-2’ (the slow thinking system). System-1 is fast, automatic, effortless, and intuitive. And it cannot be turned-off. While, system-2 is slow, effortful and lazy. But in all, system-2 is a very supportive system.

However, this idea can be a divergence from reality, as in real life it is difficult or even impossible to find such agents that will make perfectly rational decision as reflected by irrational human behaviour. Though the assumption of individuals act rationally is important when analysing economics and interactions. This is because if we don’t assume everyone act rationally, if there’s a loss of welfare, we will not be able to decide whether it is the result of flaw in the structure or just because of irrationality.

My independent research in the field started with my curious interest in the processes of how decisions made by individuals and governments, what are the main factors encouraged them to choose particular decision over other options and the outcomes of those decisions. Then, I started to read theories of great Economists, such as, Keynes, Freidman , Devenport, Kinnerly and Mason who wrote on decision-making and the ability of individual to interpret the information. Additionally, there were theories by De Bondt , Clark , Tversky and Kehnman who argued that human psychology is interconnected with economics which cannot be ignored. Learning those theories and comparing them with the real life happenings, my enthusiasm to get deeper insights of economics increased. Encouraged by this, I have compiled