What is Behavioural Decision Theory?
Most decisions involve risk and uncertainty. Should I walk to the traffic light or dash across the street? Invest in stocks or bonds? Volunteer for an environmental charity or a women’s shelter? From the simplest to the most complex situations, we all make choices without knowing what the outcomes will be. Research shows that people rely on mental short-cuts (collectively referred to as “heuristics and biases?) to simplify their choices. In essence, people are not the rational actors described by economic theory, and they do not have perfect insight into their own likes and wants. Behavioural Decision Theory provides a framework for describing and predicting how people will make choices and act under conditions of risk and uncertainty – conditions that dominate the business world. Q: What are “heuristics and biases?? Heuristics are mental shortcuts that can skew our judgement. This skew can, in turn, lead to biases in our behaviour. Generally speaking, very few of us use data and caref
