Economics and Decisions April 15, 2015

Decisions In general our lives are about making one small decision after another Abundance of choice is becoming a problem You can only make a finite amount of choices in a given day As the day goes on the mind becomes paralyzed to act or makes impulsive choices View decisions as currency Limited supply, used wisely EVERY decision you make each day adds up

Decision Fatigue Warps judgment of everyone Helps explain why we Get angry Exceed our budget Buy junk food You can’t make decision after decision without paying a biological price The drain of mental energy

Physiology You are not consciously aware of becoming mentally tired Become low on mental energy The more choices you make, the harder the next choice becomes Brain looks for short cuts Reckless & impulsive Do nothing – eases short term mental strain & resist change in the long run

Once you are fatigued  reluctant to make trade offs Advanced & taxing form of decision making Look for one dimension – ex. price Leaves you vulnerable to marketers who know how to time their sales When decision fatigue sets in you tend to take the advice of “experts” Responds strongly to immediate rewards Drink soda & eat candy Pays less attention to long-term prospects How will this affect me in 20 years?

Willpower Weakens late in the day The diet dilemma 1. In order not to eat, a dieter needs willpower. 2. In order to have willpower, a dieter needs to eat.

Fewer decisions  less decision fatigue No outward sign of decision fatigue Propensity to experience everything more intensely Frustrations seem more irritating Impulsive behavior becomes more powerful Illogical shortcuts that favor short term gains & delayed costs Take the safer, easier option even when there are extreme costs involved

Good Decision Making State that fluctuates People with the best self-control structure their lives to control willpower Schedule (no back to back meetings) Avoid temptations Establish habits that eliminate the mental effort of making choices Budget their decisions Well rested & good nutrition

Reframing Quick to dismiss small decisions as inconsequential (short run) $4 latte each day Look at their entirety (long run) $1500 spent each year on coffee Make certain decisions now in order to limit the need to make more choices later Retirement savings

Self Control Not the final defense against disaster Conserved by developing effective habits and routines Reduce stress Avoid crisis Effectively manage time Make big decisions early in the day

The best decision makers are the ones who know when not to trust themselves.