Behavioral Economics in the Epoch of Technology: Decision-Making Processes

Behavioral Economics: An Overview

Heuristics, framing, and market inefficiencies are the three fundamental focuses of behavioral economics. Heuristics are “rules of thumb” that people use to guide their decision-making. We can make decisions more swiftly and reliably with cognitive biases. Framing occurs when tales and assumptions are mixed. At the same time, market inefficiencies occur under the umbrella of behavioral finance, which studies market anomalies such as company loss aversion, unfair competition, and arbitrage. They all affect decision-making, which is a seemingly straightforward procedure. Heuristics (biases) and framing (perspective), in particular, impact almost every conscious decision a person makes.

The fact is that people regularly make the same errors and need more understanding of subjects like risk assessment and corporate incentive, in which behavioral economics is well-versed. In essence, behavioral economics investigates the processes involved in market decision-making and how they affect consumer behavior.

Behavioral economics combines principles of economics and psychology to comprehend how and why individuals behave in the real world. According to neoclassical economics, people have clearly defined preferences and base their actions on those preferences in a self-interested manner. Since it has been demonstrated that even when given the information and means to do so, people do not always make decisions that neoclassical economics would define as the “rational” or “optimal” course of action, behavioral economists otherwise opined to study human behavior to decision making constantly. 

The Information Age and Decision-Making

The digital space offers informational value to every decision you are about to make, as the increase in data availability affects decision-making. “Decision is all about information—it is data-based”. George et al. (2014) assert that the expansion of digital data and concomitant developments in digital tools for assessing this data (Phan et al., 2017) influence our understanding of how humans absorb information while making decisions. Also, your cognitive capabilities and the amount of time available to decide to limit acquiring all the information needed to make fair judgements. Nevertheless, when cognitive resources and attention are depleted, decision-making becomes impulsive and shallow, frequently neglecting to evaluate critical aspects of a situation even though this information is readily available. 

Therefore, it is acceptable to ask whether a wealth of information ensures sound decision-making. Cognitive fit theory, another school of thought, acknowledges that humans may be overloaded with information. When this occurs, it has a high likelihood of negatively influencing decision-making. As a result, information must be supplied to reduce cognitive load and increase decision-making efficiency and efficacy.

Also, making judgments based on basic rules of thumb, or heuristics, can result in systemic mistakes known as “biases.” However, the method is generally effective among professionals who can draw on vast experience and information. Nevertheless, it is not a guarantee of error-free decisions since these specialists may fall victim to confirmation biases—the propensity to acquire or process new information in a way that supports one’s presuppositions. Importantly, people are largely unaware of the biases and mental shortcuts they use to make decisions. Your decisions are influenced by the way that choices are presented. Behavioral insights also show how people’s computational limits and motivated reasoning shape judgment and decision-making. Thus, people should give themselves enough thinking time, appropriate cognitive capability, excellent motivation, and a genuine drive for reasonable outcomes to prevent irrational decisions.

Conclusion

In the digital age, understanding decision-making processes has become increasingly vital. It is germane for individuals, businesses and managers to understand the complexities of overloaded data to navigate the information era properly and make intelligent decisions. The availability of information and the quick speed of technological improvements have substantially altered how decisions are made. Decision-makers should understand their behaviors, analyze their confidence bias and engage analytical tools and methodologies to gain valuable insights from vast amounts of available data. Finally, in a more sophisticated and linked world, this information helps individual decision-makers to adapt, innovate, and make more effective judgments.

References

George, G., Haas, M. R. and Pentland, A. (2014). ‘Big data and management’. Academy of Management Journal, 57, 321– 26.

Phan, P., Wright, M. and Lee, S.-H. (2017). ‘Of robots, artificial intelligence, and work’. Academy of Management Perspectives, 31, 253– 55.