Combining economics and psychology to improve decisionmaking from "summary" of Misbehaving by Richard H Thaler
The key idea here is that we can use insights from psychology to improve economic decision making. Traditional economics assumes that people are rational, self-interested, and fully informed. But as we all know, that's not always the case. Sometimes we don't act in our own best interests, we are influenced by emotions, and we don't have all the information we need. This is where psychology comes in. By understanding how people actually behave - with all their quirks, biases, and limitations - we can develop better economic models and policies. For example, we can design choice architectures that nudge people towards making better decisions, like saving more for retirement or eating healthier. One of the main insights from psychology is that people often suffer from self-control problems. We have a hard time resisting temptation and sticking to our long-term goals. Traditional economics assumes that we will always make rational choices that maximize our well-being, but in reality, we often give in to short-term desires at the expense of our long-term welfare. Another important concept is bounded rationality. This means that our cognitive abilities are limited, and we can't always make optimal decisions. We rely on heuristics - mental shortcuts - to simplify complex problems, but these shortcuts can lead us astray. By understanding these limitations, we can improve decision making by providing better information, simplifying choices, and changing the default options.- By combining economics and psychology, we can develop a more accurate and realistic understanding of human behavior. This can lead to better policies and interventions that help people make decisions that are in their best interests. It's not about assuming that people are perfectly rational, but recognizing that we are all human - with all our flaws and imperfections - and designing systems that take that into account.
