Decision Making: A bird in the hand can make a lot of sense

Very Important Excerpt (Via John Kay )

Irrationality lies not in failing to conform to some preconceived notion of how we should behave, but in persisting with a course of action that does not work.

Behavioural economics is often sourced to Danny Kahneman and Amos Tversky, but credit should go to the earlier work of a Frenchman, Maurice Allais. Allais was less concerned to show that our behaviour was irrational than to argue that the premises of rationality itself were irrational. In fact, he suggested that they were part of an American conspiracy to deny the subtleties of how sophisticated people – such as the graduates of elite French schools – think. He may have had a point.

Allais’ most famous experiment showed that we often treat very high probabilities very differently from certainties, although “rational” individuals would regard them as almost the same thing. But very high probabilities often are different from certainties: very high probabilities are usually derived from calculations whose relevance and validity are themselves uncertain.

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26. August 2010 by Miguel Barbosa
Categories: Behavioral Economics, Curated Readings | Leave a comment

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