Monday, 15 October 2012

Behavioural Economics can predict irrational human behaviour

I have been reading about Behavioural Economics (and Behavioural Finance) through the excellent 8-minute summaries from  BE explains why we are systemically and predictably irrational in our economic decisions and introduces 2 terms “Bounded Rationality" and "Bounded Willpower” as limits to rationality within which we all operate.

Here are 8 prevalent behavioural biases identified by BE which resonate with my previous article on Meta Dilemmas:
  1. Endowment Effect: tendency to place more value on expected losses than expected gains (also known as Risk Aversion)
  2. Status Quo Bias: tendency to stick with current state of affairs even though we can see clearly better alternatives
  3. Framing Bias: tendency to draw conclusions according to the way something seems as opposed to reality
  4. Availability Bias: tendency to rely on easily available information rather than seeking out harder to obtain but more accurate/relevant info
  5. Confirmation Bias: tendency to prioritise evidence which accords with our pre-existing beliefs
  6. Choice Overload: where we have so many options we don’t make any decision
  7. Overconfidence: tendency to rate ourselves more knowledgeable and skilful than we actually are
  8. Money Illusion: tendency to judge prices and interest rates at nominal rates rather than taking into account inflation
The article explains how the current global financial crisis could be analysed behaviourally as a large number of players in the market all succumbing to 3 main BE biases - overconfidence, confirmation bias and availability bias.

Ken Thompson (aka The BumbleBee) blogs about bioteams, virtual collaboration and business simulation at