Economics is a social science that studies human society and behaviors. Did you know the difference between classical economics and behavioral economics when it comes to decision-making for an individual? Classical economics originated in the late 18th century and under this approach, economists assume that when an individual has access to enough correct information, they will make rational decisions and make choices that can maximise their satisfaction. On the other hand, behavioral economics assumes that individuals are not rational and are biased by psychological, emotional, and social factors in the decision-making process. Behavioral economics is often regarded as the more practical approach.
In today’s article, I will be covering the aspects of behavioral economics, different factors individuals take into account when making irrational decisions that don’t necessarily maximise their satisfaction… Being aware of these factors can allow you to become a better critical thinker and more likely to be able to detect and avoid pitfalls behind every choice you have!
The first cognitive bias is Heuristic, meaning the decisions of individuals are made based on their past experiences. An example of this can be a student who decides to dispose of the entire roll of bread based on the ‘best before date’ label as the student relies on the general rule of thumb that any food item that isn’t fresh should be disposed of. If it is not fresh, it doesn’t necessarily mean that it cannot be safely used anymore(“used by”).
Another one is a more common cognitive bias called framing. This bias is what businesses tend to use in their marketing strategies to take advantage of the customers. Framing refers to decision-making influenced by how the information is presented to the decision-makers. For example, the poster for a new burger with the words ‘90% fat-free!’, is designed to attract customers despite the fact the burger could also be reasoned as containing ‘10% fat!’.
The third cognitive bias is anchoring which refers to people relying on a mental reference point in order to help make decisions even if the information is not necessarily relevant or accurate. An example is when an investor observes a stock price reaching $50 after a recent drop in stock price, the $50 becomes an anchor from which the investor based their investment decision. Anchor creates a bias for the investor in favour of the decision to buy the stock at a relatively low price even though the stock could potentially fall further in the future.
The final cognitive bias I will be going over today is the availability bias. This refers to the tendency of people to believe the information that is readily accessible and to make decisions by overestimating the risk and frequency of that event happening. For example, a documentary of the incident of flight MH370 missing, causes a person to overestimate the risk of the flight from Beijing to Kuala Lumpur and decide not to purchase the ticket despite a rational consumer would purchase it based on discounted price and low probability of missing flights.
This topic is handy in real-life scenarios and I hope this article helped you understand the different cognitive biases. Don’t let these biases control your decision making and just make sure to keep them in the back of your mind so that when it comes to making decisions you’re unlikely to fall into different pitfalls by the businesses and make valid decisions!
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