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Bounded Rationality and Beyond
News on the effects of bounded rationality in economics and business, relationships and politics
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Irrationality in Economic Decisions — Some Historical Considerations

Irrationality in Economic Decisions — Some Historical Considerations | Bounded Rationality and Beyond | Scoop.it

Drawing from history and psychology, behavioral economics offers a radically different perspective to help us understand how people, organizations and markets really operate in comparison to the traditional economic models. Behavioral economics’ lens on human behavior posit that people are bound by biases they are largely unaware of, thus assuming that their behavior is based on rational economic decision-making processes. Much of the hypothesis testing governing behavioral economics is based on experiments carried out in controlled laboratory conditions. Some traditional economists argue that while the results of these experiments are interesting, they do not invalidate the rational models of traditional economics. Relegating behavioral economics to the fringes of economics, they cite the controlled nature of behavioral experiments carried out by psychologists as the reason why these experiments fail to take into account the most important regulator of perceived rational behavior, the large competitive marketplace.7

Another reason why psychological and social aspects of human behavior do not feature in economic theory is that theoretical economics developed rapidly in the 1950s. In its quest to be recognised as a science, economists simplified their models to make them more scientifically rigorous and mathematically treatable. At the time, psychology was an evolving discipline and was yet to branch into the economic domain of human behavior. Whatever the reasons, the near collapse of the world financial markets at the turn of this decade, and the admission by some of the most powerful players in politics, economics and global finance, that they were clueless about the pending economic disaster and what to do about it, has brought the debate about behavioral economics’ contribution to economic thought into the mainstream.

 

Via Emre Erdogan
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Game interrupted: The rationality of considering the future

Game interrupted: The rationality of considering the future | Bounded Rationality and Beyond | Scoop.it

The “problem of points”, introduced by Paccioli in 1494 and solved by Pascal and Fermat 160 years later, inspired the modern concept of probability. Incidentally, the problem also shows that rational decision-making requires the consideration of future events. We show that naïve responses to the problem of points are more future oriented and thus more rational in this sense when the problem itself is presented in a future frame instead of the canonical past frame. A simple nudge is sufficient to make decisions more rational. We consider the implications of this finding for hypothesis testing and predictions of replicability.


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Belief in the unstructured interview: The persistence of an illusion

Abstract

Unstructured interviews are a ubiquitous tool for making screening decisions despite a vast literature suggesting that they have little validity. We sought to establish reasons why people might persist in the illusion that unstructured interviews are valid and what features about them actually lead to poor predictive accuracy. In three studies, we investigated the propensity for “sensemaking” - the ability for interviewers to make sense of virtually anything the interviewee says—

and “dilution”—the tendency for available but non-diagnostic information to weaken the predictive value of quality information. In Study 1, participants predicted two fellow students’ semester GPAs from valid background information like prior GPA and, for one of them, an unstructured interview. In one condition, the interview was essentially nonsense in that the interviewee was actually answering questions using a random response system. Consistent with sensemaking, participants formed interview impressions just as confidently after getting random responses as they did after real responses. Consistent with dilution, interviews actually led participants to make worse predictions. Study 2 showed that watching a random interview, rather than personally conducting it, did little to mitigate sensemaking. Study 3 showed that participants believe unstructured interviews will help accuracy, so much so that they would rather have random interviews than no interview. People form confident impressions even interviews are defined to be invalid, like our random interview, and these impressions can interfere with the use of valid information. Our simple recommendation for those

making screening decisions is not to use them.

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Animal Spirits: How Human Psychology Drives the Economy, and Why it Matters for Global Capitalism

Speaker: Professor Robert J. Shiller
Chair: Professor David Webb
This event was recorded on 20 May 2009 in Old Theatre, Old Building
The global financial crisis has made it painfully clear that powerful psychological forces are imperiling the wealth of nations today. From blind faith in ever-rising housing prices to plummeting confidence in capital markets, "animal spirits" are driving financial events worldwide. Robert Shiller will put forward a bold new vision that will transform economics and restore prosperity.
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The Nature of the Beast: What Behavioral Economics Is Not

People are complex; they defy easy summary. Like Walt Whitman, we all contain multitudes. As a discipline, economics has been successful in part because it has ignored this complexity. Instead it has focused on explaining the institutions in which decisions are made — with institutions ranging from capitalism to communism, from perfect competition to monopolies, and from rock-paper-scissors to the prisoner’s dilemma.
Behavioral economics differs from standard economics in that it uses a more realistic (and more complicated) model for people; it differs from psychology in that it maintains the focus on institutions and the contexts in which decisions are made. Behavioral economists study how the context of decisions interacts with our expanding understanding of human psychology. By combining the insights from these two very different perspectives, behavioral economists have been able to reveal new depths in ourselves.

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How Our Minds Mislead Us: The Marvels and Flaws of Our Intuition

How Our Minds Mislead Us: The Marvels and Flaws of Our Intuition | Bounded Rationality and Beyond | Scoop.it

"Every year, intellectual impresario and Edge editor John Brockman summons some of our era’s greatest thinkers and unleashes them on one provocative question, whether it’s the single most elegant theory of how the world works orthe best way to enhance our cognitive toolkit. This year, he sets out on the most ambitious quest yet, a meta-exploration of thought itself:Thinking: The New Science of Decision-Making, Problem-Solving, and Prediction (public library) collects short essays and lecture adaptations from such celebrated and wide-ranging (though not in gender) minds as Daniel Dennett, Jonathan Haidt, Dan Gilbert, and Timothy Wilson, covering subjects as diverse as morality, essentialism, and the adolescent brain.

One of the most provocative contributions comes from Nobel-winning psychologist Daniel Kahneman — author of the indispensable Thinking, Fast and Slow, one of the best psychology books of 2012 — who examines “the marvels and the flaws of intuitive thinking.”

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Why Zimbardo’s Prison Experiment Isn’t in My Textbook

Why Zimbardo’s Prison Experiment Isn’t in My Textbook | Bounded Rationality and Beyond | Scoop.it
The results of the famous Stanford Prison Experiment have a trivial explanation. 

My own guess is that the behavior of the guards was largely if not entirely the result of their doing what they were told to do and what they believed they were supposed to do. The behavior of the prisoners in the first day or two, when they were pretending to riot and pretending to plot escapes, was probably also playacting of stereotyped concepts of what prisoners do.  But their subsequent wearing down, passivity, and apparently genuine desire to get out of the prison may very well have been a direct response to what the guards were doing to them (coupled, I imagine, with their lack of sleep--the guards were on shifts but they were not).

From this point of view, there is nothing in the results of the study that should surprise us. Once we say that the guards humiliated and oppressed the prisoners because they were told to do that and felt it was important to do it for the sake of science, and once we say that the prisoners initially “rioted” because they felt that this is what they were supposed to do but later really did want out because they were humiliated and oppressed, what is there left to be surprised about?  Did Zimbardo and his colleagues really need to do this experiment to “prove” such an obvious result?  And does this really tell about the behavior of real guards and prisoners, who are not there for a two-week experiment (for the good of science), but are there because that is how they make their living or because they are being punished for a crime?  There is no way to simulate the real experiences of being a guard or a prisoner.

Too often, in our psychological research labs, we trivialize reality.  Zimbardo’s prison experiment is a good example of that.  If I had included Zimbardo’s experiment in my textbook, it would have been to make that point.

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John Balz of Opower on Being a Behavioral Marketing Manager

John Balz of Opower on Being a Behavioral Marketing Manager | Bounded Rationality and Beyond | Scoop.it

John Balz of Opower talks about his role as a Behavioral Marketing Manager and why more companies should Chief Behavioralist in the 1st place. Check it out!  Behavioral scientists have carved out a place in the academy by following scientific methods and generating statistical evidence for behavioral theories. When putting these ideas practice, showing results gets you part of the way there.

It can tell you a direction to head, but not necessarily what the final destination looks like. How are talented non-behavioralists going to design a mobile payment app based on behavioral ideas X, Y, and Z plus a given technological limitation?

My own experience has been that devising great behavioral solutions requires both an emotional and an intellectual understanding of the idea. Advertisers and marketers excel at the former.

They can infuse behavioral science into a project without ever using its terms. If you’re working with a designer, a copywriter, or a software engineer on a strategy built around loss aversion, skip the jargon. It’s meaningless.

But has a soda machine ever eaten a dollar you put in it?

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Terence R. Egan's curator insight, November 11, 2013 7:11 PM

Marketing gets it!

 

I'd suggest that Marketing invented the Nudge decades ago. The Neuroeconomists are bringing a more sophisticated approach and understanding to discipline.

 

When will HR begin to acknowledge these principles and turn the insights inward?  Employees are human beings too. HR should stop complaining that they're never einvited to the 'strategy table'.  Too slow! Too conventional!

 

>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>

 

 

[Article Key Points]

 

It may sound simple, but one fundamental insight of our work is that to change behavior you don’t necessarily need to directly persuade someone to do something. People influence other people, of course.

Companies frequently turn to this form of social proof by telling people how many others around them are doing X or buying Y. Action often follows.

 

Humans have been using and influencing each other with symbols since the beginning of time. Marketers have been implicitly using behavioral ideas for decades. The best ones would probably read a book like Nudge and recognize past campaigns in the recommendations and principles.

 

... devising great behavioral solutions requires both an emotional and an intellectual understanding of the idea. Advertisers and marketers excel at the former. They can infuse behavioral science into a project without ever using its terms.

 

If you’re working with a designer, a copywriter, or a software engineer on a strategy built around loss aversion, skip the jargon. It’s meaningless. But has a soda machine ever eaten a dollar you put in it? That flash of anger you felt. That’s loss aversion. Tap that memory and let’s solve this problem.

 

 

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How behavioural design can overcome the dark side of big data

How behavioural design can overcome the dark side of big data | Bounded Rationality and Beyond | Scoop.it

The effort to influence human behaviour in constructive ways dovetails neatly with both the core ethics and key challenges of sustainable businesses across the globe. Behavioural design can be one way to influence the way people act but for it to be successful, you often have to rely on and understand datasets. Luckily, behavioural design is also very powerful when it comes to making sense of data – even the dark side of it.

Enter big data coupled with behavioural design. A combination of obvious potential as the essence of big data is to track behaviour in real time and at a large scale. Last month, the American energy software company Opower announced a further expansion of its recent efforts to combine behavioural design with big data. Opower supplied customers with personalised home energy reports that showed how much power a household had used compared to its neighbours. This has led to a decrease in consumption as social norms kicked in and people strived to cosume less energy than their neighbours. This is one example where data can be used to influence behaviour in a positive way.

 
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What Behavioural Economics Is Not

What Behavioural Economics Is Not | Bounded Rationality and Beyond | Scoop.it

Behavioural economics is not (a) about controlling behaviour (b) conservative or liberal (c) about irrationality. So what exactly is it?

People are complex; they defy easy summary. Like Walt Whitman, we all contain multitudes. As a discipline, economics has been successful in part because it has ignored this complexity. Instead it has focused on explaining the institutions in which decisions are made — with institutions ranging from capitalism to communism, from perfect competition to monopolies, and from rock-paper-scissors to the prisoner’s dilemma. Behavioral economics differs from standard economics in that it uses a more realistic (and more complicated) model for people; it differs from psychology in that it maintains the focus on institutions and the contexts in which decisions are made. Behavioral economists study how the context of decisions interacts with our expanding understanding of human psychology. By combining the insights from these two very different perspectives, behavioral economists have been able to reveal new depths in ourselves.


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RSA Replay: The Era of Behaviour

On Thursday 31 October, LRN CEO and author of 'How', Dov Seidman visited the RSA to outline the implications for living and working in what he calls the 'Era of Behaviour', where the source of competitive advantage has dramatically shifted from what we do, to how we do it.
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Making Risk-Taking Riskier Will Hurt Startups

Making Risk-Taking Riskier Will Hurt Startups | Bounded Rationality and Beyond | Scoop.it

A recurring theme of this year’s presidential campaign is the need to encourage the formation of new businesses. Republicans in general, and Mitt Romney in particular, have stressed that the best way to stimulate such startups is via low tax rates on high-income earners.

Romney wants to cut top rates by 20 percent, maintain the favorable treatment given to capital gains and dividends, and completely eliminate the estate tax, which currently only kicks in on estates in excess of $5 million for an individual or $10 million for a (heterosexual) married couple.

In other words, this is a strategy that emphasizes maximizing the after-tax returns if and when you hit it big. Yet if you think about the way most new businesses are started, it should be clear that these tax incentives have very little to do with the decisions facing most new entrepreneurs.

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Behavioral economics taps power of persuasion for tax compliance

Behavioral economics taps power of persuasion for tax compliance | Bounded Rationality and Beyond | Scoop.it
(Reuters) - Can peer pressure make delinquent taxpayers pony up what they owe the government? 

Can peer pressure make delinquent taxpayers pony up what they owe the government?

Behavioral economists say it can, and some tax agencies in both the United States and Britain are taking their advice to heart -- and finding that they are reaping rewards.

Behavioral economics has already upended investing and finance with new theories on why and how people make decisions about their money.

From the simple re-wording of late notices to changing the structure of back-tax payment plans, tax collectors are getting results by tapping into basic human tendencies. Whether it is the desire to do what peers do or to stick with a voluntary commitment, persistent patterns of human conduct revealed by behavioral economics are gradually being targeted to boost tax revenues at very low cost.

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Why Obamacare is a Success? It's for nudge?

There are 2 major political parties in America. I’m a member of the naïve, stupid, and cowardly one. I’m a Republican. How stupid is the GOP? They still don’t get it. I told them 5 years ago, 2 books ago, a national bestseller ago (“The Ultimate Obama Survival Guide”), and in hundreds of articles and commentaries, that Obamacare was never meant to help America, or heal the sick, or lower healthcare costs, or lower the debt, or expand the economy.

 

The GOP needs to stop calling Obamacare a “trainwreck.” That means it’s a mistake, or accident. That means it’s a gigantic flop, or failure. It’s NOT. This is a brilliant, cynical, and purposeful attempt to damage the U.S. economy, kill jobs, and bring down capitalism. It’s not a failure, it’s Obama’s grand success. It’s not a “trainwreck,” Obamacare is a suicide attack. He wants to hurt us, to bring us to our knees, to capitulate- so we agree under duress to accept big government.

 

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Society for Judgment and Decision Making newsletter is ready for download

Society for Judgment and Decision Making newsletter is ready for download | Bounded Rationality and Beyond | Scoop.it
SOCIETY FOR JUDGMENT AND DECISION MAKING NEWSLETTER
 
The quarterly Society for Judgment and Decision Making newsletter is ready for downloading:
http://sjdm.org/newsletters/
It features jobs, conferences, announcements, and more.
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Gesturing While Talking Influences Thoughts

Gesturing While Talking Influences Thoughts | Bounded Rationality and Beyond | Scoop.it

When people gesture with their hands while talking, it helps change their thoughts. If you ask someone to show you how to tie their shoe-laces or play Jenga, they will almost certainly use their hands to do so.

Even people who have been blind from birth, and have never seen gestures, still use them while they talk. But these gestures aren’t just a way of communicating, they may also be a way of abstracting and encoding the information.

In a study investigating how gestures interact with thoughts, Beilock and Goldin-Meadow (2010) had participants trying to solve a test often used by psychologists called ‘The Tower of Hanoi’ task.

Essentially this involves moving some blocks from one tower onto another.

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Play Jazz on Campus! | Adbusters Culturejammer Headquarters

Play Jazz on Campus! | Adbusters Culturejammer Headquarters | Bounded Rationality and Beyond | Scoop.it

Forty years ago, any student who enrolled in an undergraduate degree at the Faculty of Economics at Sydney University had to complete four year-long courses in economics: Microeconomics and Quantitative Methods in the first year, Macroeconomics in the second, and International Economics in the third.

Now in 2011, the Faculty of Economics and Business evicted the economics discipline into the Arts Faculty, and the economics-free entity renamed itself as University of Sydney Business School. There is now just one compulsory semester-long economics subject (Economics for Business Decision Making) in any Bachelor of Commerce degree at Sydney University, out of 24 such subjects—and that pattern is replicated across the globe. Economics has declined from 40 per cent of any business-oriented degree to 4 per cent in 40 years. For a profession obsessed with linear regression, it has suffered a near-perfect linear regression of its own.

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Che cos'è la mente estesa?

Che cos'è la mente estesa? | Bounded Rationality and Beyond | Scoop.it
Che cos'è la mente estesa? 
 Il nostro problema consiste nel fatto che abbiamo cercato la coscienza dove nonc'è. Dovremmo invece cercarla dove essa si trova. La coscienza non è qualcosa cheaccade dentro di noi. Piuttosto, è qualcosa che facciamo o creiamo. Meglio: èqualcosa che realizziamo. La coscienza assomiglia più alla danza che alla digestione(Alva Noe, 2010)
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Confucianism and Preferences: Evidence from Lab Experiments in Taiwan and China*

This paper investigates how Confucianism affects individual decision making in Taiwan and in China. We found that Chinese subjects in our experiments became less accepting of Confucian values, such that they became significantly more risk loving, less loss averse, and more impatient after being primed with Confucianism, whereas Taiwanese subjects became significantly less present-based and were inclined to be more trustworthy after being primed by Confucianism. Combining the evidence from the incentivized laboratory experiments and subjective survey measures, we found evidence that Chinese subjects and Taiwanese subjects reacted differently to Confucianism.

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Sharing or gambling? On risk attitudes in social contexts

Abstract: This paper investigates experimentally whether risk attitudes are stable across social contexts. In particular, it focuses on situations where some resource (for instance, a position, decision power, a bonus) has to be allocated between two parties: the decision maker can either opt for sharing the resource or for using a random device that allocates the entireprize to one of the two parties. By varying the relative situation of the decision maker with respect to the other party, we show that risk attitude is strongly affected by social contexts: participants in the experiment seem to be relatively risk seeking when they possess a relatively weaker position than the other party and risk averse when the opposite is true. Our main average results seem to be driven by the behavior of around a quarter of subjects whose choices appear to be fully determined by social comparisons.
Various interpretations of the behavior are provided linking our results to preferences under risk with a social reference point and on status-seeking preferences

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Why Managers Haven't Embraced Complexity

Why Managers Haven't Embraced Complexity | Bounded Rationality and Beyond | Scoop.it
Complexity wasn’t a convenient reality given managers’ desire for control.
The promise of applying complexity science to business has undoubtedly been held up by managers’ reluctance to see the world as it is. Where complexity exists, managers have always created models and mechanisms that wish it away. It is much easier to make decisions with fewer variables and a straightforward understanding of cause-and-effect. Here, the shareholder value philosophy, which determines so much of how our corporations operate these days, is the perfect example. Placing a rigid priority on maximizing shareholder returns makes things clear for decision-makers and relieves them of considering difficult tradeoffs. Of course we know that constantly dialing down expenses and investments to boost short-term margins inevitably damages the long-term health of the company. It takes a complexity approach to keep competing values and priorities and the effects of decisions on all of them in view — and not just for management, but equally for investors, analysts, and regulators.
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Reinventing Social Sciences in the Era of Big Data

Reinventing Social Sciences in the Era of Big Data | Bounded Rationality and Beyond | Scoop.it

Sune Lehmann is an Associate Professor at DTU Informatics, Technical University of Denmark. In the past, he has worked as a Postdoctoral Fellow at Institute for Quantitative Social Science at Harvard Universityand the College of Computer and Information Science at Northeasthern University; before that, he was at Laszlo Barabási’s Center for Complex Network Research at Northeastern University and the Center for Cancer Systems Biology at the Dana Farber Cancer Institute.

I wouldn’t call him stupid. He is okay. Well he is actually pretty great. Forget that, he is freaking fantastic! We should get him over for one of our events! And so we did. Sune will speak at the 2nd#projectwaalhalla December 12. 

Tickets for the #projectwaalhalla Social Sciences for Startups are for sale. Get one of the last earlybird tickets, or just come on over. December 12, indoor skatepark Waalhalla. But for now, let’s get on with the interview. 

This time, let’s begin at the beginning, before we dive in deeper. Your main research project has to do with measuring real social networks with high resolution. I know for a fact you don’t mean 3D printed social networks.

But what are you aiming for, and how are you going to get there?

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Middle-aged Britons are so downbeat about money - FT.com

Middle-aged Britons are so downbeat about money - FT.com | Bounded Rationality and Beyond | Scoop.it

Early middle age, it seems, is the new winter of our discontent.High quality global journalism requires investment. Some research from the US, where similar patterns of savings emerge, may help to understand that loss aversion. Writing in a recent publication of the Federal Reserve Bank of Cleveland, LaVaughan Henry suggests that the wealth-to-income ratio is a good measure of households’ preparedness for retirement. Using flow of funds data, Mr Henry points out that for Americans aged 45-54, that ratio in 2010 was slightly higher than in 1983 – but far lower than in 2007, immediately before the crash. Today’s 45 to 54-year-old Americans have recent, and vivid, experience of a loss of wealth that is likely to have a big impact on their willingness to take risk.

That, Barclays’ Mr Davies said, could account for the bias towards cash. “The events that hit that cohort can be long lasting. It may cause people to stay away from asset classes they perceive as risky for the rest of their lives.”

 
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Master Class 2008: Putting Psychology into Behavioral Economics (Class 6) | Edge.org

Master Class 2008: Putting Psychology into Behavioral Economics (Class 6) | Edge.org | Bounded Rationality and Beyond | Scoop.it

RICHARD THALER: ehavioral economics and good psychology, there's a lot of art. There is science and there are well-crafted experiments, but thinking about what the right experiment to run, was art and, there are 80 gazillion experiments, which ones are relevant to getting people to plant the right seed. That's a problem that Sendhil and I have been talking about for, well, since he was born. You're now seeing the results of 15 years of conversations. And there wasn't a scientific way of answering that question.

SENDHIL MULLAINAITHAN: A lot of what makes behavioral economics interesting is psychology, it is about what happens inside the mind. These phenomena are taking things that are happening inside the mind and interfacing them with things happening in the world, the environment, and getting feedback or getting interesting responses from that.

We happen to call the word economics. But it's not economics. You could be talking about crime, you could be talking about many things, in the social domain, the entire spectrum of human behavior. Anyone who is interested in the broader world should be interested in something we currently call "behavioral economics".

DANIEL KAHNEMAN: What we're saying is that there is a technology emerging from behavioral economics. It's not only an abstract thing. You can do things with it. We are just at the beginning. I thought that the input of psychology into behavioral economics was done. But hearing Sendhil was very encouraging because there was a lot of new psychology there. That conversation is continuing and it looks to me as if that conversation is going to go forward. It's pretty intuitive, based on research, good theory, and important. 

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David Ignatius - The Death of 'Rational Man'

David Ignatius - The Death of 'Rational Man' | Bounded Rationality and Beyond | Scoop.it

What allowed some people to see the financial crash coming while so many others missed its gathering force? I put that question recently to Nouriel Roubini, who has come to be known as "Dr. Doom" because of his insistent warnings starting in 2006 that we were heading into a global firestorm.

Roubini gave two kinds of answers. The first involves standard number-crunching of the sort that economists routinely do -- and that Roubini just did better and sooner. It's his second answer that's more interesting, because it goes to the heart of what we should take away from this crisis: Roubini decided to discard the assumption of market rationality that underlies most economics and to embrace the psychological insights of what's known as "behavioral economics."

 

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