Behavioral Economics: This Is Your Brain On Money | World of Psychology

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For decades, economists did not find much merit in connecting psychology with finance. That changed when a young economics professor from the University of Chicago, Richard Thaler, introduced himself to two Israeli psychologists, Daniel Kahneman and Amos Tversky. Together they are credited with founding behavioral economics.

Behavioral economics, and its close cousin, neuroeconomics, combines the disciplines of neuroscience, economics, and psychology to study how people make financial decisions.

Using Psychology to Save You From Yourself, an National Public Radio podcast, explains the origins and development of behavioral economics. Kahneman, a 2002 Nobel Prize laureate for economics, studied what he called “the illusion of validity,” i.e. our judgment can be very wrong even though we are the last to acknowledge it.

For example, when a prospective employer is considering a candidate for a job they often weigh the job interview the heaviest in their decision making, a choice proven over and over again to be a mistake. Twice I hired people primarily on the basis of an impressive interview, only to let them go during the probationary period. Another time (after being burned) I hired the second runner up because her experience and credentials were the best. That person turned out to be golden.

Kahneman and Tversky pointed out lots of other errors humans commonly make in decision making, explaining why we can so easily be sucked in by clever marketing or most insidiously, credit card merchants. I found it fascinating to read their explanation of “anchoring bias”:

It turns out that whenever you are exposed to a number, you are influenced by that number whether you intend to be influenced or not.

Original URL

http://psychcentral.com/blog/archives/2009/10/26/behavioral-economics-this-is-your-brain-on-money/#

http://psychcentral.com/blog/archives/2009/10/26/behavioral-economics-this-is-your-brain-on-money/#