Irrationality and Behavioral Economics
Javier Ramirez
Liberty University
BUSI 520: Strategic Marketing Management
Muriel Wilson
January 2, 2022
Irrationality and Behavioral Economics
Instead of making optimal choices, people often behave in ways that seem irrational
and even against their own interests. Behavioral economics explains why individuals may
make irrational choices by demonstrating how their decision-making is influenced by:
Biases (such as future discounting)
Heightened emotions
Faulty heuristics
Mental fatigue
Loss aversion
Choice overload
Perceived social norms
Situational framing
Context
What's more, many decisions must be made under conditions of great uncertainty,
where not much is known about all the risks and benefits of a choice or where those
features are constantly shifting. Behavioral economics aims to understand the effects of
uncertainty on decision-making in such realms as consumer purchasing, financial savings,
and lifestyle changes.
What are some examples of bias in behavioral economics?
A knee-jerkbiasinvolves making fast, instinctive decisions instead of taking time to
deliberate. With Occam’srazorbias,a person assumes that the most obvious solution is the
best. A siloeffecttakes a too-narrow approach to making decisions. Confirmation
bias focuses on information that affirms a given set of beliefs and assumptions. Individuals
may also succumb to inertiabias—thinking and acting in ways that are familiar and
predictable—or myopiabias—interpreting the world through the narrow lens of their
personal history and emotional baggage.
What is the main drawback in using heuristics to solve problems?
To preserve cognitive resources, people may use heuristicsto inform their decision-
making. However, these mental shortcuts, often based on generalizations and subjective
experience, may be limited or faulty. As a result, people make decisions based on imperfect
information and lazy thinking that are just as likely to be wrong as they are to be right.
What are some examples of heuristics that lead to irrational choices?
Does having too many options lead to poor decision-making?
How Can You Influence People's Behavior?
Many people are inclined to choose an option that brings instant pleasure, rather than
the one which will beget long-term satisfaction at the expense of short-term gratification.
Using behavioral economics, individuals and institutions can take advantage of this to
manipulate people into a specific course of action or purchase.
One way that a person can be influenced is through a "nudge," a combination of
positive reinforcement and indirect suggestions encouraging specific behaviors. Not all of
these manipulations are harmful, as behavioral economics can be used to get people to
make positive behavioral changes, such as eating less or saving more money.
