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Behavioral Economics: When Psychology and Economics Collide

Behavioral Economics: When Psychology and Economics Collide

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Behavioral Economics: When Psychology and Economics Collide

Course No. 5532
Professor Scott Huettel, Ph.D.
Duke University
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Course No. 5532
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Course Overview

Behavioral economics is the scientific study of decision making, and of the related topics of valuation, exchange, and interpersonal interactions. Drawing on methods from psychology, sociology, neurology, and economics, this remarkable discipline illuminates one of the most deeply fundamental activities of human existence: the decision process.

From the moment we wake in the morning, we are confronted with decisions—from what to buy at the supermarket or how to spend the weekend to which career path to pursue, which car to buy, or how to invest our money. Most of the time we make good decisions. But some of the time we don’t. Whether our decisions are successful or less than optimal influences how our lives unfold.

Paradoxically, although we are constantly making decisions, we rarely reflect on the actual process of decision making itself. Making decisions can seem largely intuitive—and intuitions don’t always lead to happy outcomes. But what if you could be fully aware of the process? What might life be like if you could put your hands on the gears of decision making—the specific patterns of perception and cognition that shape your choices—and turn the process to your advantage?

Behavioral economics offers just that possibility. With an incisive focus on human behavior, behavioral economics uncovers what is usually hidden from view in our decision-making process, exploring the key motivators for our decisions, such as probability, risk, reward, and the passage of time. In doing so, it sheds fascinating light on our psychology and on how our brains process information and shape our perceptions as we make decisions.

Most important, by applying its unique approach to many kinds of real-life choices, behavioral economics offers powerful, practical tools for making better and more satisfying decisions.

As a case in point, behavioral economics identifies many human biases or behavioral tendencies that influence our decisions, sometimes outside of our awareness. Behavioral economists show, for example, that our brains predispose us to see things that are familiar as being better or more valuable—making name-brand merchandise or stocks of familiar companies seem desirable. This innate human tendency can lead to bad economic decisions.

The good news, as behavioral economics clearly shows, is that our customary processes and patterns of decision making are not inevitable. By becoming aware of them and watching how they operate in our daily actions, we can open new possibilities for our own behavior and for decision making that can meaningfully improve our quality of life.

In Behavioral Economics: When Psychology and Economics Collide, award-winning Professor Scott Huettel of Duke University leads you in a penetrating look at the processes of decision making that are an integral part of human life. In 24 revealing lectures, you’ll study how behavioral economists look at decision making and explore a set of core principles that offer profound insight into how we gather information and integrate multiple factors to reach decisions. Using real-life examples and case studies, each topic builds to concrete recommendations so that you can understand the patterns of decision making, the purposes they serve, and how to use your knowledge to make more effective and beneficial decisions.

Uncover the Hidden Structures in Decision Making

Professor Huettel brings focus to intriguing and seemingly paradoxical questions regarding human behavior:

  • Why does voluntary blood donation decline steeply when people are paid for it?
  • When faced with the same medical condition, why do doctors choose objectively better treatment for their patients than they do for themselves?
  • Why do employees often fail to enroll in beneficial retirement plans, including plans requiring no financial contribution on their part?

All of these may seem counterintuitive, yet they have a deep structure that we can understand when we apply the tools of behavioral economics. In grasping the underlying factors in decision making, you’ll explore key topics such as these:

  • Simple rules: “heuristics”: Study the common internal guidelines people use to streamline decision making, or “heuristics”; observe four of the most prevalent ones, using real-life examples; and identify where heuristics are helpful and where they fail.
  • Decisions regarding probability: Learn how human beings convert objective information about probability into a subjective sense of what may happen—an approach filled with error—and grasp two methods for improving probability-based decisions.
  • Time-related decisions: Consider why decisions involving time are so challenging; study how time influences the subjective value of money; and learn key strategies for making better time-related decisions.
  • Dealing with risk: Examine the element of risk tolerance in decision making; investigate the dynamics of perceived benefits versus perceived risks in decision problems; and study principles for successfully managing risk.
  • High stakes: medical decisions: Uncover three core factors that influence how we make medical decisions, and learn how to apply the principles of behavioral economics to improve choices in this area.
  • Group decision making: Explore how the diversity of groups benefits decision making, and investigate the principles that lead to good group decisions and how to use those principles in a range of practical contexts.

Behavioral Biases: Turning Limitations into Strengths

As a central element of these lectures, Professor Huettel highlights cognitive patterns that influence our behavior, pushing us toward safety, temptation, or immediate rewards. Among these is what behavioral economists call confirmation bias—the tendency, in decision making, to intuitively seek evidence that confirms our existing beliefs, or to reinterpret evidence that argues against existing beliefs. Using clear-cut examples, you’ll learn how you can counteract or minimize this bias, leading to better-informed and wiser choices.

The course concludes with an in-depth look at two highly effective approaches to shaping decisions. “Precommitment” to a course of action involves making a binding decision in the present for benefits that will occur in the future. “Reframing” strategies alter how the facts of a decision are evaluated against some reference point, allowing critical new insights to appear. You’ll explore the powerful effects of precommitment and reframing in examples ranging from economic transactions and consumer choices to decisions regarding investment and retirement.

Practical Leverage for Empowering Choices

In Behavioral Economics: When Psychology and Economics Collide, you’ll gain a much deeper awareness of how you make decisions, and what steps you can take to make better ones. Professor Huettel illustrates each concept with meaningful stories, analogies, and case studies, relating the material directly to the decisions all of us make as a central part of living. This unique inquiry offers you important knowledge and insights for one of life’s most essential skills.

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24 lectures
 |  29 minutes each
Year Released: 2013
  • 1
    What Is a Good Decision?
    Begin by examining “rational choice” models of decision making from traditional economics, which assume consistent, foresighted, and self-interested decision makers. Then consider how this concept fails to explain many human decisions that appear counterintuitive or paradoxical. Identify two fundamental limitations that challenge our decision-making process. x
  • 2
    The Rise of Behavioral Economics
    Grasp how behavioral economics uses methods from both economics and psychology to better understand biases and anomalies in decision making—factors that “rational choice” models don’t explain. Learn three core experimental principles of behavioral economics, and about Prospect Theory, which helps explain what human beings value. x
  • 3
    Reference Dependence—It’s All Relative
    The element of “value” lies at the heart of decision making. Explore the nature of value and the roles of both pleasure and “benefit” in human choices. Then study the neurobiology of decision making and the ways in which the neurotransmitter dopamine creates expectations and activates reward seeking or “wanting,” an integral factor in our behavior. x
  • 4
    Reference Dependence—Economic Implications
    “Reference dependence” is one of the most central concepts in behavioral economics. Learn how human beings use value to create an expectation or reference point in many decision-making situations, leading to biases that affect choices. Consider how these biases influence both individual and market behavior, and how understanding them can help us make better decisions. x
  • 5
    Range Effects—Changing the Scale
    The principle of “range effects” describes how the relative difference between two quantities becomes less meaningful as the absolute values of those quantities get larger. Grasp how this phenomenon explains apparent inconsistencies in human behavior, and how its existence is linked to our biology. Learn specific steps you can take to minimize its unwanted influence on your decisions. x
  • 6
    Probability Weighting
    “Probability weighting” describes how people tend to convert objective information about probability into a subjective sense of what may happen—which can lead to bias and error. Observe how this applies to real-life situations such as buying life or travel insurance, and learn two tools to change how you deal with probabilities. x
  • 7
    Risk—The Known Unknowns
    Tolerance for risk is another fundamental element of decision making. Learn how behavioral economics evaluates “risk aversion” and “risk seeking” in both economic and personal contexts, and grasp the role of perceived benefits and perceived risks in explaining risk-taking behavior and choices. Finally, study two basic principles for managing risk. x
  • 8
    Ambiguity—The Unknown Unknowns
    In behavioral economics, “ambiguity” refers to conditions in decision making in which we do not know and cannot estimate the probabilities of potential outcomes. Here, investigate three circumstances in decision making that produce ambiguity: “hidden information,” “asymmetrical knowledge,” and “unfamiliar contexts.” Then, learn a two-step approach for dealing effectively with ambiguity. x
  • 9
    Temporal Discounting—Now or Later?
    Now consider a fundamental challenge in decisions involving time: temporal discounting, or the human tendency to view rewards as worth less in the future than they are in the present. Study real-life examples of this phenomenon, three explanations for why it occurs, and key approaches to making better time-related decisions. x
  • 10
    Comparison—Apples and Oranges
    This lecture explores how people create and compare the subjective values of different options in order to make a decision. Review substantial evidence indicating that our brains construct subjective value at the moment of a decision; then look at ways to use this process of active construction to your advantage. x
  • 11
    Bounded Rationality—Knowing Your Limits
    The concept of “bounded rationality” describes human behavior regarding complex decisions. Using the example of purchasing a car, observe how our brains naturally narrow options and judge alternatives, creating simple rules to make complexity manageable. Learn also about “unconscious decision making” and surprising data suggesting that active deliberation can often impede good decisions. x
  • 12
    Heuristics and Biases
    Behavioral economics defines “heuristics” as internal rules or tools that people use to optimize decision making. Explore four of the most commonly used heuristics, observable in decisions involving memory, valuation, probabilities, and emotions. Using real-world examples, identify where these tools are helpful, and where they fail. x
  • 13
    Randomness and Patterns
    Here, look into the nature of randomness—situations in which we can’t predict the future from the past—and why it matters for decision making. Study how our brains automatically look for patterns and structure, often “seeing” patterns whether they are present or not, and learn ways to counteract this tendency. x
  • 14
    How Much Evidence Do We Need?
    Study the role of evidence, or “meaningful information,” in decision making and the kinds of mistakes we make with regard to it. Grasp how we tend to overestimate the quality of evidence and to seek evidence that confirms our prior beliefs, and how we can learn to minimize our biases regarding evidence. x
  • 15
    The Value of Experience
    Regarding buying decisions, consider the value we attach to purchasing experiences. Review studies comparing purchases of material goods with experiences, and evidence that purchases of experiences lead to more happiness. Consider the role of memory in the satisfaction related to experiences, and how we can prioritize our buying decisions for greater quality of life. x
  • 16
    Medical Decision Making
    In the high-stakes world of medical decisions, learn how behavioral biases apply to both patients and their physicians. Study three key factors that influence how we make medical decisions. Finally, learn how to apply the principles of behavioral economics to this specific area, so that the process of decision making improves. x
  • 17
    Social Decisions—Competition and Coordination
    Now consider how the decision process changes when we coordinate our decisions with others. In doing so, encounter the elements of game theory, which models interactions during strategic decision making. Study the challenges involved in small group decisions, the role of emotion in their outcomes, and recommendations for navigating interpersonal decisions. x
  • 18
    Group Decision Making—The Vox Populi
    This lecture examines the “wisdom of crowds,” where groups are shown to make better decisions than individuals. Explore why this is so, focusing on the element of diversity, and also where this phenomenon fails. Evaluate the primary factors in good group decisions and how to promote them in a range of contexts. x
  • 19
    Giving and Helping—Why Altruism?
    Why do people act to help others, even when those actions may not be in their own interest? Investigate the nature of altruism and human behavioral biases that affect generosity and charitable giving. Identify how we can use these biases as tools to both encourage giving and make better decisions. x
  • 20
    Cooperation by Individuals and in Societies
    Here, explore why we (and other animals) work together for mutual gain, and what kinds of interactions lead to cooperative behavior. Observe how cooperation arises through a combination of self-interest, awareness of others’ actions, and social norms, and how it is maintained through practices of punishment and reward. x
  • 21
    When Incentives Backfire
    In certain cases, incentives can backfire, actually discouraging behavior that they’re intended to encourage. Review studies demonstrating this effect in both small-scale interpersonal interactions and large-scale social policies. Identify how external incentives can undermine people’s internal motivations, and study four key guidelines for where incentives work. x
  • 22
    Precommitment—Setting Rationality Aside
    In “precommitment” strategies, we make binding decisions in the present for benefits in the future. Study precommitment in situations such as retirement savings, economic transactions, and organ donation programs. Learn how it works effectively when it is credible and costly, and how we can use it to improve our personal quality of life. x
  • 23
    Framing—Moving to a Different Perspective
    A “framing” effect is a change in people’s decisions when the same objective information is presented in two different ways. Grasp the powerful effects of framing in examples from consumer marketing, investing, and retirement planning. Learn how the framing effect provides a highly potent tool for making good decisions. x
  • 24
    Interventions, Nudges, and Decisions
    Conclude with a look at how leaders and policymakers can shape other people’s decisions. Consider five core approaches to influencing beneficial decisions, and a key policy model that fosters people’s well-being while maintaining their autonomy. Reflect on both ethical concerns about the scientific study of decision making and its real potential to improve lives. x

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Scott  Huettel

About Your Professor

Scott Huettel, Ph.D.
Duke University
Professor Scott Huettel is the Jerry G. and Patricia Crawford Hubbard Professor of Psychology and Neuroscience at Duke University. He earned his Ph.D. from Duke in Experimental Psychology and completed a postdoctoral fellowship in functional brain imaging and decision science at the university’s medical center. He is also the founding Director of the Duke Center for Interdisciplinary Decision Science. Professor Huettel...
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