The decision making process also depends upon the decision being made and there can be several factors which influence our decision making. To name a few, factors like past experience, cognitive biases, age and individual differences, belief in personal relevance, etc. influence the choices we make. To be able to understand what decisions are made, understanding of these factors is very important.
Human psychology and perception plays a dominant role in deciding how human beings make decisions. Perception can be defined as a process by which individuals organize and interpret their sensory impressions in order to give meaning to their environment. It becomes so important as people's behavior depends more on their perception of reality than the reality itself. Factors such as personal attitudes, motives, interests, experiences and expectations along with the time, work setting and social situation influence the perception of an individual. Why students strive so hard to clear the UPSC Civil Services Exams in India- maybe because of the perception that an IAS or IPS officer gets huge prestige besides having the vast powers of the public office.
Various types of errors and biases enter our decision making process when we try to take shortcuts while deciding. Let’s try to understand them. Among your friends, if you are considered to have a good sense of direction, you will hesitate to ask for help despite knowing the fact that you are lost while driving a car with your friends inside. This is known as Overconfidence Bias where we tend to be overly optimistic. If you are a dog lover and see a vicious dog attacking an innocent child, you tend to believe that the dog is defending itself against a menacing child. This is known as Confirmation bias which occurs when a person interprets a situation according to their own pre-existing beliefs. Few other errors/ biases in our decision making are Anchoring Bias, Availability Bias, Escalation of Commitment, etc. Hope we will discuss more about these concepts in the coming blogs.
In Behavioral Economics, we have something called the “rational choice theory” which assumes that human actors have stable preferences and engage in maximizing behavior. But this theory of rational choice has its own limitations. It is here that we define a term called “Bounded Rationality” which states that our decisions are not always optimal. According to the works of Herbert Simon (1982) and Kahneman (2003), the term bounded rationality can be understood as restrictions to the human information processing, due to limits in knowledge (or information) and computational capacities.
We prefer credit cards over cash transactions despite knowing the fact that it is going to cost more. Why? The answer is quite simple and can be explained by the theory of mental accounting which says that people think of value in relative rather than absolute terms. In this situation the pain is thought to be reduced in credit card purchases, because plastic is less tangible than cash, the depletion of money is less visible and payment is deferred. We all must have experienced the moment of panic when the waiter comes to our table to take the order and we are still struggling to contemplate the appetizers on page 1 of a 10-page menu? This is referred to as Choice Overload which may lead to less satisfaction derived from our choice or reduced confidence in decision making or inhibition of any decision at all. The concept of choice overload explains well the bounded rationality of humans. Sometimes people refrain to obtain knowledge which is freely available. Research studies have shown that investors are less likely to check their portfolio online when the stock market is down than when it is up. We call this as Information avoidance in behavioral economics which goes hand in hand with our assumption of bounded rationality where people have limited ability to process the information.
Your Sunday plans might get affected when you have your exams the coming Monday, right?
Hope we have discussed some crucial aspects of the complex human decision making process. Thanks for reading. Cheers!
