from the economics man to the behavior man

Topics: Decision theory, Decision making, Decision analysis Pages: 9 (5007 words) Published: May 19, 2015


MAY 2015

From “Economic
Man” to Behavioral
A short history of modern decision making
by Justin Fox



FOR ARTICLE REPRINTS CALL 800-988-0886 OR 617-783-7500, OR VISIT HBR.ORG ARTWORK Millo, 2014
B.ART–Arte in Barriera, Turin, Italy
Justin Fox, a former
editorial director of HBR, is
a columnist for Bloomberg
View. He is the author of The
Myth of the Rational Market
(HarperBusiness, 2009).

A short history of
modern decision making
by Justin Fox

From “Economic Man”
to Behavioral Economics


WHEN WE MAKE DECISIONS, we make mistakes. We all know this
from personal experience, of course. But just in case we didn’t, a seemingly unending stream of experimental evidence in recent years has documented the human penchant for error. This line of research—dubbed heuristics and biases, although you may be more familiar with its offshoot, behavioral economics—has become the dominant academic approach to understanding decisions. Its practitioners have had a major influence on business, government, and financial markets. Their books—Predictably Irrational; Thinking, Fast and Slow; and Nudge, to name three of the most important— have suffused popular culture.

So far, so good. This research has been enormously informative and valuable. Our world, and our understanding of decision making, would be much poorer without it.
It is not, however, the only useful way to think about making decisions. Even if you restrict your view to the academic discussion, there are three distinct schools of thought. Although heuristics and biases is currently dominant, for the past half century it has interacted with and sometimes battled with the other two, one of which has a formal name—decision analysis—and the other of which can perhaps best be characterized as demonstrating that we humans aren’t as dumb as we look.


May 2015 Harvard Business Review 3


Adherents of the three schools have engaged
in fierce debates, and although things have settled
down lately, major differences persist. This isn’t
like David Lodge’s aphorism about academic politics being so vicious because the stakes are so small. Decision making is important, and decision scholars
have had real influence.
This article briefly tells the story of where the
different streams arose and how they have interacted, beginning with the explosion of interest in the field during and after World War II (for a longer view,
see “A Brief History of Decision Making,” by Leigh
Buchanan and Andrew O’Connell, HBR, January
2006). The goal is to make you a more informed consumer of decision advice—which just might make you a better decision maker.

The Rational Revolution

During World War II statisticians and others who
knew their way around probabilities (mathematicians, physicists, economists) played an unprecedented and crucial role in the Allied effort. They used analytical means—known as operational research in the UK and operations research on this side of the Atlantic—to improve quality control

in manufacturing, route ships more safely across
the ocean, figure out how many pieces antiaircraft
shells should break into when they exploded, and
crack the Germans’ codes.
After the war hopes were high that this logical,
statistical approach would transform other fields.
One famous product of this ambition was the nuclear

Updating Probabilities
The math behind Bayes’
Theorem is simple, even
if the application of it often
isn’t. Here’s an illustration,
adapted from Nate Silver’s
brilliantly clear explanation
in The Signal and the Noise.

4 Harvard Business Review May 2015

Let’s say that before Sept. 11, 2001, you
put the odds that terrorists would crash
a plane into a New York skyscraper (x)
at 0.005%. After...
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