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What is behavioral economics? Why does it matter to you?

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Podcast Episodes

What is behavioral economics? Why does it matter to you?

242. Biases — Math Is Hard (Refreshed Episode)

Today’s episode is one that originally aired on June 14, 2019, as part of an 8-part series I called “All the Biases” which took hundreds of biases and sorted them into different categories. Because our brains are complex interconnected webs, this could have been done in many ways and the biases mentioned could belong in multiple areas. I selected groupings based on what I thought would make the most sense to this audience and applying the information about our biased brains into business. 

This episode goes through a lot of concepts at a very high level. Unlike the foundations episodes of the podcast, which sometimes have a full hour dedicated to a full concept, many of these will get a sentence or only a few points. This episode is more about bringing your attention to the concepts, what is out there, and to scratch the surface of the complexity of our brains. I chose this episode as the refresh for this week because it mentions ambiguity and uncertainty aversion, which is the topic for this coming Friday’s brand new foundations episode, so it felt like a nice way to set the stage for that. Ready to dig in on all the biases? Let’s go…

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SHOW NOTES:

  • [00:39] Today’s episode is one that originally aired on June 14, 2019, as part of an 8-part series I did called “All the Biases” which sorted hundreds of biases into different categories.
  • [03:14] Our brains are lazy and they like to take the path of least resistance to get to what they believe to be a good enough answer as quickly as possible.  
  • [04:51] Because we are particularly lazy with math, we rely on the source of whatever is thrown our way. The brain would rather risk being wrong than take the time to do the numbers in everyday interactions. 
  • [07:17] It is important to know what people care about when you set up your messaging. 
  • [08:25] Due to “the less is better effect”, our preference changes when we evaluate things alone versus comparing them against others. 
  • [10:23] Due to the money illusion we tend to concentrate on the nominal or face value of our money instead of thinking of it in terms of how much it can get for us.  We are more likely to spend money in smaller denominations.  
  • [13:09] Due to the IKEA effect people will value things more that they made themselves or partially assembled than things they did not. The endowment effect is where we value things we own more than things we do not. 
  • [15:45] Playing to win is not the same as playing not to lose (game theory). 
  • [15:58] We have all sorts of bad habits when it comes to placing a value on time. 
  • [18:20] If you have something people will be excited about you can make the wait a little more enjoyable to increase the experience. With a mundane task, reducing the wait as much as possible is key (or, often even better as discussed with Dilip Soman in episode 241, is to look at the opportunity within the wait). 
  • [20:44] “Hot hands” are not real (hot hands fallacy) but our brains like to think this is true due to the clustering illusion. Our brains like to look for patterns.
  • [22:27] People are more likely to prefer the things they know to things that are unknown. We are much more likely to choose an option that we know the odds for even if they are terrible because we are so afraid of the unknown (ambiguity / uncertainty aversion).
  • [24:36] Consider the known and know that the unknown doesn’t negate everything else when making a decision. 
  • [25:59] When we want something today, we value it differently than tomorrow (time discounting). When we look at tomorrow or things we don’t know about we expect the worst even when there is nothing to make us feel that way other than our own natures.
  • [26:55] Most of us don’t properly understand how averages impact our lives every day and this can impact the decisions we make in business. 
  • [27:15] Melina shares a story from Thinking Fast and Slow about regressive bias.
  • [29:47] The instructor has attached a causal interpretation to the inevitable fluctuations of a random process. 
  • [32:00] Everything we know to be true is not necessarily true. It is easy to find the right answer to the wrong question. 
  • [33:25] The lesson is to know that our brains like to tell us stories. They write their own rules and details that serve what the subconscious thinks is best. Taking a little extra time and being a little more open can change your view and your success rate. 
  • [34:00] Melina’s closing thoughts
  • [35:02] Adapting your lenses and looking from multiple angles and depths is really important to make that possible, which is why an episode like this is so valuable.
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