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Drawing on aspects of both psychology and economics, the operating assumption of behavioral economics is that cognitive biases often prevent people from making rational decisions, despite their best efforts.(If humans were comic book characters, we’d be more closely related to Homer Simpson than to Superman.) Behavioral economics eschews the broad tenets of standard economics, long taught as guiding principles in business schools, and examines the real decisions people make—how much to spend on a cup of coffee, whether or not to save for retirement, deciding whether to cheat and by how much, whether to make healthy choices in diet or sex, and so on.In our first treatment (the control condition), individual participants were asked to write the number of problems they answered correctly on collection slips and give them to an experimenter, who checked the totals against the problem sheets.In a second treatment, participants shredded their answer sheets without verification and simply submitted their collection slips to the experimenter.
It’s been a painful lesson, but the silver lining may be that companies now see how important it is to safeguard against bad assumptions.When organizations acknowledge and anticipate irrational behavior, they can learn to offset it and avoid damaging results. A few years ago, my colleagues and I found that most individuals, operating on their own and given the opportunity, will cheat—but just a little bit, all the while indulging in rationalization that allows them to live with themselves.(See “How Honest People Cheat,” HBR, February 2008.) We also found that the simple act of asking people to think of their ethical foundations—say, the Ten Commandments—or their own moral code before they had the opportunity to cheat eliminated the dishonesty. Do autonomous teams make better, more ethical decisions? In a series of three experiments, we gave participants 20 math problems to solve in five minutes and paid them 50 cents for each correct answer.Revenge and cheating are only two of the irrational behaviors that companies will find underlying their employees’ and customers’ actions.
Once an understanding of irrationality is embedded in the fabric of an organization, a behavioral economics approach can be applied to virtually every area of the business, from governance and employee relations to marketing and customer service.
In this lively article, the author, a professor of behavioral economics at Duke University, shows how the emerging discipline of behavioral economics can help businesses better defend against foolishness and waste.