Outsmart Your Brain: Mental DIscipline, #4
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What motivates us into doing or avoiding things? Why do our predictions not reflect reality?
Traditional economics claims humans are rational actors. But is this true? Think about the last time you bought something expensive; was that item really the best choice based on value and utility? We all fall prey to irrationality and biases and make decisions based on them. This contradicts the wisdom of traditional economics.
Outsmart Your Brain challenges everyday wisdom with the help of psychology and economics, commonly known as behavioral economics. Here you'll find counterintuitive answers to the motivations behind our actions.
This book is for those who don't fear reality, have inquisitive an nature, enjoy challenges, and like to understand the real motivations of human nature – who like to outsmart their brains.
Why do smart people make irrational decisions so often?
- Understand why people value some things more than others.
- How to use incentives to actually achieve what you want.
- Understand the role dopamine plays in your decision-making to be more vigilant about your snap judgments.
- Get around your natural biases related to loss, ownership, and risk.
This compilation of experiments and studies mixed with the author's wit will shift your understanding of human behavior. By recognizing the biases mentioned in this book:
- You can make better decisions – be it in business, personal life, or community.
- Avoid the serious consequences that certain biases lead us into.
- You'll know how people think, so you can help others make choices that are the best for them.
- Learn the difference between perceived and actual risks and use this knowledge to your advantage.
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Outsmart Your Brain - Steven Schuster
Outsmart Your Brain
Identify and Control Unconscious Judgments, Protect Yourself From Exploitation, and Make Better Decisions The Psychology of Bias, Distortion and Irrationality
Steven Schuster
Copyright © 2019 by Steven Schuster. All rights reserved.
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Contents
Introduction
1. What is Behavioral Economics?
2. Reference Dependence
3. Economic Implications of Reference Dependence
4. Probability Weighting
5. Risk
6. Comparison
7. Bounded Rationality
8. Social Decisions
Afterword
Reference
Notes
Introduction
Think about the last time you made a decision. Was it to call your mother? Or perhaps to wait for the express train to come instead of the local, or to go through the yellow light instead of stopping? We all make thousands of these small decisions every day, and most of the time they prove to be correct. If you did not get in a car accident when you decided to go through the yellow light or made better time to work by taking the express, this was probably the right choice. Humans are generally good decision-makers; otherwise, we would be getting into accidents and making people angry all the time, and it would be a struggle to get through daily life.
We all also make more difficult decisions: which job offer to take, whether to make an offer on a house or apartment, whether to invest our money in the stock market or put it in a retirement account. Economists have assumed for years that people make all these decisions rationally, meaning that they will think about the pros and cons of each choice, project future consequences, and then make an educated decision based on this thought process. This assumption has allowed economists to create many different models that excel at predicting large-scale events like stock market fluctuations, recessions, voting patterns, and consumer actions.
However, these models do not work to describe every kind of behavior. Sometimes people don't act according to what economists believe are rational choices. They don't always spend more money when there's a sale, or they end up ordering their old standby meal because a restaurant menu has too many options. As the field has developed in the last fifty years, decision scientists have created a new field called behavioral economics that combines psychology, economics, and neuroscience to better describe decision-making processes in the real world.
This book will serve as an overview of this new field of study.
The first chapter will be an overview of the basics of what behavioral economics is.
The second chapter will explore reference dependence, which is one of behavioral economics' fundamental principles.
The third chapter will detail the implications of reference dependence.
The fourth chapter will discuss the elements of probability weighting, or how probabilities turn into influences on our decision-making.
Chapter 5 will deal with risk as it appears in economics, that is, as a decision-making factor.
Chapter 6 examines the science of comparison.
Chapter 7 explains the principle of bounded rationality—that is, the inherent limits on rationality in our thinking process.
Finally, Chapter 8 will discuss how all these principles interact to create models for our social decisions.
This book presents this information with the aim of improving your own decision-making process as you move through life. Although no one can be a perfect decision maker—all people have biases, after all—understanding the process will help you work with these biases and make more informed, well-considered choices that take into account rewards, pain, loss, and risk and provide the most successful results possible.
One
What is Behavioral Economics?
As we have already mentioned, behavioral economics combines psychology, economics, and neuroscience to predict and describe decision-making behaviors. There were two problems that drove the creation of the field: whether the underlying principles of economics, utility, and profit are actual drivers of human behavior, and whether people always work to maximize the utility they gain from their decisions. Utility
here approximately means benefits;
mostly, it works to expand the parameters of economic behavior from just money and labor to things like time and pleasure. ¹
The ideal person, at least according to an economist, would always make decisions that will result in them gaining the most utility. This ideal
is called rational choice theory,