Economic Decision Making: How Our Mind Works

With the rise of behavioral economics, there is now much greater realism in the description of human decision making. This paper explores and integrates important behavioral economic understandings concerning how our mind works with respect to economic decision making. From scholars like Herbert Simon, Daniel Kahneman and George Loewenstein we have learned that people have limited cognitive capacity to deal with the complexity of the real world, make many cognitive errors, and often make poor decisions when strong negative emotions are aroused. Also, our minds in decision making are too often oriented to seeking what we want or desire, not what is really good for us. There is also some good news. We can learn how to avoid error and become more skilled, good enough decision makers. Gerd Gigerenzer has explained how successful decision makers typically use heuristics in the face of complexity. To illustrate the above, this paper provides analyses of food-related decision making related to the obesity social problem. To counter decision-making deficiencies, people can raise their decision making capacities by making a variety of investments in intangible human capital. Another important implication is that decision-making deficiencies contribute to businesses’ internal inefficiencies (X-inefficiencies). Thus, decision-making deficiencies imply below potential national productivity.