Economic Decision Making: How Our Brain Works

29 Pages Posted: 6 Dec 2012

See all articles by John F. Tomer

John F. Tomer

Manhattan College - Department of Economics and Finance

Date Written: December 6, 2012

Abstract

With the rise of behavioral economics, we have become much more aware that we humans do not make decisions like the rational, solely self-interested beings depicted in neoclassical economics. There is now much greater realism in the description of human decision making. Humans are recognized to be predictably irrational as they regularly err in making certain kinds of decisions. This paper explores and integrates important understandings concerning how our brain works with respect to economic decision making.

From scholars like Herbert Simon, Daniel Kahneman and George Loewenstein we have learned that people have limited cognitive capacity to deal with the complexity of the real world, make many cognitive errors, and generally make poor decisions when strong negative emotions are aroused. Also, our minds in decision making are too often oriented to seeking what we want or desire, not what is really good for us. Besides this bad news about human decision-making, there is some good news. It is that we can learn how to avoid error and become more skilled, good enough decision makers. Gerd Gigerenzer has explained how successful decision makers typically use heuristics to deal with complex situations and that these heuristics are not only faster but may be able to achieve at least as good performance as rationally oriented methods that use much more information.

This paper also provides illustrative analyses of food-related decision making that are related to the obesity social problem, thereby suggesting some of the ways in which our less than rational brain functioning contributes to the incidence of obesity. An important economic implication of this research is that decision-making deficiencies could be a significant contributor to low national productivity, and thus may be an important reason for an economy’s underperformance.

Keywords: economic decision making, cognitive error, human brain, human capital, bounded rationality, food decision making, x-efficiency

JEL Classification: B5, I1, J24

Suggested Citation

Tomer, John F., Economic Decision Making: How Our Brain Works (December 6, 2012). Available at SSRN: https://ssrn.com/abstract=2185974 or http://dx.doi.org/10.2139/ssrn.2185974

John F. Tomer (Contact Author)

Manhattan College - Department of Economics and Finance ( email )

Riverdale, NY 10471
United States
518-273-1851 (Phone)

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