Question

Specifically, what are the concerns about rational decision making, cognitive bias, and economics on rational thinking? How does this approach apply to decisions on business strategy, pricing, investment, uncertainty...

Answer 1

Specifically, what are the concerns about rational decision making, cognitive bias, and economics on rational thinking

• RATIONAL DECISON MAKING- Rational decision making is a multi-step process, from problem identification through solution, for making logically sound decisions.Rational decision making is a multi-step process for making choices between alternatives. The process of rational decision making favors logic, objectivity, and analysis over subjectivity and insight. The word “rational” in this context does not mean sane or clear-headed as it does in the colloquial sense. Rational decision making brings a structured or reasonable thought process to the act of deciding. The choice to decide rationally makes it possible to support the decision maker by making the knowledge involved with the choice open and specific. This can be very important when making high value decisions that can benefit from the help of tools, processes, or the knowledge of experts.

• COGNITIVE BIAS- A cognitive bias is a type of error in thinking that occurs when people are processing and interpreting information in the world around them. The human brain is powerful but subject to limitations. Cognitive biases are often a result of your brain's attempt to simplify information processing. They are rules of thumb that help you make sense of the world and reach decisions with relative speed.A cognitive bias is a systematic error in thinking that affects the decisionsand judgments that people make. Some of these biases are related to memory. The way you remember an event may be biased for a number of reasons and that in turn can lead to biased thinking and decision-making. Other cognitive biases might be related to problems with attention.

• ECONOMICS ON RATIONAL THINKING- Rational Thinking refers to a decision-making process that is based on making choices that result in the optimal level of benefit or utility for an individual. The assumption of rational thinking implies that people would rather be better off than worse off. Most conventional economic theories are based on the assumption that all individuals taking part in an action or activity are behaving rationally.Rational bthinking does not necessarily require a person to attempt to get the highest return; the optimal benefit for an individual may involve non-monetary returns and/or risk considerations.

How does this approach apply to decisions on business strategy, pricing, investment, uncertainty...?

The rational decision making assumes that people will make choices that maximize benefits and minimize any costs. The idea of rational choice is easy to see in economic theory. For example, most people want to get the most useful products at the lowest price; because of this, they will judge the benefits of a certain object (for example, how useful is it or how attractive is it) compared to those of similar objects. They will then compare prices (or costs). In general, people will choose the object that provides the greatest reward at the lowest cost.The rational-decision-making model does not consider factors that cannot be quantified, such as ethical concerns or the value of altruism. It leaves out consideration of personal feelings, loyalties, or sense of obligation. Its objectivity creates a bias toward the preference for facts, data and analysis over intuition or desires.

Cognitive biases can be caused by a number of different things, but it is these mental shortcuts, known as heuristics, that often play a major contributing role. While they can often be surprisingly accurate, they can also lead to errors in thinking. Social pressures, individual motivations, emotions, and limits on the mind's ability to process information can also contribute to these biases.

Here are cognitive biases that will affect your marketing strategies

• loss aversion-Loss aversion is a bias that causes people to avoid loss more strongly than they pursue gains.In marketing, you should present your product or service as something that could be lost if the customer doesn't act. Causing them to feel a sense of loss will evoke a stronger response than offering something for them to gain.

• Anchoring-The anchoring bias causes people to rely on the first piece of information they hear or see about a product or service.An awareness of anchoring can allow you to implement techniques that will cater to this human bias. Marking down prices, setting quantity limits, or focusing users' attention on the primary consideration point in a purchase will affect how they buy.

• Choice-Supportive Bias-All of us hold preferences that have little factual evidence to support them. We will defend a preferred flavor of ice cream, type of phone, favorite sports team, political ideology, superstitious hunch, or worldview because we focus on its positives, not giving much consideration to its negatives.

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