Ch 2 consumer theory basics

Behavioralists kahneman included have been cataloging

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Unformatted text preview: se who have followed thi s debate within the world of economics, but it also has a lot to say about how we think, react, and reach —rather, jump to— conclusions in all spheres. What most interests Kahneman are the predictable ways that errors of judgment occur. Synthesizing decades of his research, as well as that of colleagues, Kahneman lays out an architecture of human decision -making—a map of the mind that resembles a finely tuned machine with, alas, some notable trapdoors and faulty wiring. Behavioralists, Kahneman included, have been cataloging people’s systematic mistakes and nonlogical patterns for years. A few of the examples he cites: 1. Framing. Test subjects are more likely to opt for surgery if told that the “survival” rate is 90 percent, rather than that the mortality rate is 10 percent. 2. The sunk-cost fallacy. People seek to avoid feelings of regret; thus, they invest more money and time in a project with dubious results rather than give it up and admit they were wrong. 3. Loss aversion. In experiments, most subjects would prefer to receive a sure $46 than have a 50 percent chance of making $100. A rational agent would take the bet. Remarkably, and for similar reasons, golfers putt better when missing would leave them a stroke behind. As compelling as these examples are—repeatedly, we recognize our own biases—Kahneman’s greater achievement is to build a framework for how, or why, the mind reasons as it does. You may feel a spasm of doubt, as I did, when first introduced to his central contrivance—using two fictional “characters,” which he refers to as System 1 and System 2. Suspend your doubts for just a moment. System 2 is your conscious, thinking mind. We conceive of this active consciousness as the principal actor, the “decider” in our lives. System 2 thinks slowly; it considers, evaluates, reasons. Its work requires mental effort —multiplying 24 by 17 or turning left at a busy intersection. We attribute most of our opinions and decisions to this thinking, reasonable fellow. 9 ECO 204 CHAPTER 2 Modeling Consumer Choice and Behavior: Preferences and Budget Constr...
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