Humble Decision-Making Theory

Abstract

Behavioural economics provides unusually robust data that show that people have hardwired, systematic cognitive biases that greatly limit their intellectual capabilities. From these observations follows a set of general guidelines for decision-making – humble decision-making theory – that if widely adopted may prevent decision-makers of all types from erring, encourage wiser decisions, and enhance overall contentment by helping those making and affected by decisions to moderate their expectations.

Key words:

• Behavioural economics
• decision-making
• choices
• cognitive bias

Notes

1. For an overview of the literature on reducing one cognitive bias – the overconfidence bias – see Kaustia and Perttula (2012).

2. For example, in response to the evidence that human beings do not make decisions according to the predominant ‘rational choice’ model, some economists have introduced the concept of bounded rationality (Conlisk 1996; Simon 1982).In addition to bounded rationality, there are ‘hard’ and ‘soft’ models of rationality, as well as mixed models (Zafirovski 2003).

3. Furthermore, more regret has been suggested to occur as the result of action than inaction, leading to a bias towards inaction even when inaction may lead to losses, although this point has been challenged (Connolly and Reb 2012; Zeelenberg and Peters 2007).

4. ‘People who face very bad options take desperate gambles, accepting a high probability of making things worse in exchange for a small hope of avoiding a large loss. Risk taking of this kind often turns manageable failures into disasters. The thought of accepting the large sure loss is too painful, and the hope of complete relief too enticing, to make the sensible decision that it is time to cut one's losses. [… ] Because defeat is so difficult to accept, the losing side in wars often fights long past the point at which the victory of the other side is certain, and only a matter of time’ (Kahneman 2011, p. 318–319).