From the New York Times: Does the Body Reveal Secrets About Our Decisions?
Tuesday, May 17, 2016 at 04:03PM
Dennis Young

Sponsored by Oppenheimer Funds

"If you had a penny for every saying about money, you’d be rich: “A fool and his money are soon parted” or “Health is better than wealth.” When it comes to making smart financial decisions, however, seldom are things so straightforward.

Since we can’t tell the future, we make a best guess. But what information do we trust, which past experiences do we draw from and what instincts do we follow? And that’s to say nothing of the influences of which we may not even be aware.

Starting in the 1970s, the field of behavioral economics began examining how humans make decisions based on actual behavior, rather than pure logic.

Behavioral economists, psychologists, neuroscientists and others are researching the question of how we make decisions. Their studies show that we as humans — and investors — make decisions in many different ways. Very often these choices are not purely rational. Instead, they’re driven by intuition and biology. In an age where we’re learning more about our physiology through technology, we’re also learning how to make better decisions.

Two Israeli psychologists, Daniel Kahneman and Amos Tversky, began studying an approach to decision-making based on human behavior in the 1970s. First termed heuristics-and-biases, it would become the foundation of the field we know today as behavioral economics. In short, heuristics examine the rules of thumb we use to make decisions when information, time, or both, is scarce. These can often reveal cognitive flaws in human judgment, however.

Behavioral economics was built on a method of decision making called decision analysis. This approach requires that each potential choice be thought through to its logical end. In other words, a pros and cons list. Take how we choose which apartment to rent, for example. It can be effective if the information is reliable, but it’s often time consuming. Worse, if the information is flawed — it turns out the lack of water pressure is the reason the rent is so cheap — the outcomes can be disastrous.

The person doesn’t know why they have this feeling. Yet, this is strong enough to make an individual act on it.”

What’s more, humans don’t always think completely rationally. Often we make decisions based on past experiences, analogies or basic instincts. Take the heuristic known as “the gambler’s fallacy,” that compels us to choose heads in a coin toss just because the last flip showed tails."

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http://nyti.ms/1skcTHW

 

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