Financial Foundations Framework, Leadership, Ethics, and Trust

Designing for the Decision-Making Environment

Research Report Cover

People are not rational, yet we often assume they are. For example, classical economics is based on the assumption that people are rational maximizers of their self-interest. However, recent Nobel Prize-winning scientific research has shown this is not true. Rather than thinking through decisions rationally and comprehensively, people use a variety of mental shortcuts to make decisions. Oftentimes, these shortcuts are harmless and even helpful. But sometimes they backfire. Behavioral scientists have cataloged a number of these shortcuts and when they can go wrong. When these shortcuts fail, they are called “cognitive biases.” These biases can negatively impact all types of decisions, including budget decisions. If we know these biases, we can plan mitigations.