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Behavioral Economics

People are often lazy, in that they tend to minimize the cognitive, emotional, physical, and financial costs of activities and decisions where possible. As Gregory Berns, the distinguished chair of neuroeconomics at Emory University, has quipped, “The brain is fundamentally a lazy piece of meat.”2 We tend to equate laziness with moral turpitude but could also use the term “efficient.” Evolutionary forces presumably did not encourage inefficiency in a world where today’s feast of fresh antelope might be followed by a weeklong famine.

People are often hazy, in that rather than determining a mathematically correct answer to a problem, they use heuristics—rules of thumb—to quickly arrive at an answer. Instead of hazy, we could also use the term “computationally efficient.” The late Nobel laureate Herbert Simon proposed “bounded rationality,” based on risk, uncertainty, the lack of information as to the statistical distribution of outcomes, incomplete information about alternatives, and the complexity of calculation relative to the cost of such calculations, in time or hard dollars.3 In other words, rather than attempting to arrive at perfect decisions using information and stochastic models that we don’t have using complex algorithms requiring unlimited processing time, we just make do. In computation, a heuristic is an algorithm that can arrive at a good-enough mathematical answer in a relatively short time. In behavioral economics, though, heuristics include ...