Psychology and the Economy
The implications of Psychology on the Economy
Availability Heuristic- rule that the likelihood of selecting something is related to its availability.
Psychology is concerned with how people make decisions, and this has led to behavioral economics
which influences the way people think. It says we are irrational thinkers so it can manipulate ways of
thinking for economic betterment. For example, people overestimate the likelihood of dying in a
plane because of how often they read about it. Information is available to see and is used when
making a judgment on the likelihood of this type of accident.
Tversky and Kahneman (1973)
Researchers read out some make and female names and some of them were famous or not.
One group heard 19 famous male names and 20 non-famous female names
Second group heard 19 famous female names and 20 non-famous male names
Counterbalance gender effects
80% of judgements incorrect, influenced by famous names being more available and tipping the
balance.
Availability Heuristic and the Economy
It makes the marketing process of branding work- a company makes a slogan or logo and shows it
repeatedly until it comes to your mind easily. It may not have a particular preference, but it counts
on familiarity with the name alone to sell its products.
The Framing Effect
Participants often have a cognitive bias and their decisions change depending on whether they are
presented as a win or loss. People tend to avoid risk when a positive frame is presented but seek risk
when a negative frame is presented.
Tversky and Kahneman (1981)
Explored how phrasing affects participant’s response to a hypothetical life and death
situation.
Participant’s asked to choose between two treatments which were going to be used
on 600 patients for a deadly disease.
Groups were given same facts about success and failure of treatment but facts
framed differently.
1
The implications of Psychology on the Economy
Availability Heuristic- rule that the likelihood of selecting something is related to its availability.
Psychology is concerned with how people make decisions, and this has led to behavioral economics
which influences the way people think. It says we are irrational thinkers so it can manipulate ways of
thinking for economic betterment. For example, people overestimate the likelihood of dying in a
plane because of how often they read about it. Information is available to see and is used when
making a judgment on the likelihood of this type of accident.
Tversky and Kahneman (1973)
Researchers read out some make and female names and some of them were famous or not.
One group heard 19 famous male names and 20 non-famous female names
Second group heard 19 famous female names and 20 non-famous male names
Counterbalance gender effects
80% of judgements incorrect, influenced by famous names being more available and tipping the
balance.
Availability Heuristic and the Economy
It makes the marketing process of branding work- a company makes a slogan or logo and shows it
repeatedly until it comes to your mind easily. It may not have a particular preference, but it counts
on familiarity with the name alone to sell its products.
The Framing Effect
Participants often have a cognitive bias and their decisions change depending on whether they are
presented as a win or loss. People tend to avoid risk when a positive frame is presented but seek risk
when a negative frame is presented.
Tversky and Kahneman (1981)
Explored how phrasing affects participant’s response to a hypothetical life and death
situation.
Participant’s asked to choose between two treatments which were going to be used
on 600 patients for a deadly disease.
Groups were given same facts about success and failure of treatment but facts
framed differently.
1
