Why We Make the Choices We Do: Behavioral Economics, and Human Decisions

Part of the UNO Economics Seminar Series. This research seminar runs from 3PM-4PM. Appetizers at Inner Rail afterwards. Abstract: Behavioural economics represents an important development of economic thought by questioning the assumption that individuals consistently make rational decisions in pursuit of self-interest. Drawing on psychology, cognitive science and experimental methods, it recognises that human decisions are shaped by biases, preferences, emotions and imperfect information. Rather than treating deviations from rational behaviour as exceptions, behavioural economics places them at the centre of economic analysis. It thus offers a richer understanding of how individuals actually make choices, how markets function and why individually reasonable decisions can produce collectively undesirable outcomes. I discuss an experiment in this tradition that examined how strategic miscalculations could lead individuals to waste valuable resources through excessive investments strategic overreach. Using an economic model and laboratory experiment, it demonstrated how uncertainty about others’ intentions and the anticipated costs of effort influenced resource allocation decisions. Individuals, acting rationally from their own perspectives, collectively incurred unnecessary costs because of misjudged efforts, expectations and incentives. The experiment illustrated how credible institutional arrangements and prior commitments could reshape strategic calculations, discourage costly overreach and encourage more efficient allocation of resources towards mutually beneficial outcomes. Behavioural economics has important implications for the future of economic development. By recognising how behavioral attributes shape economic choices, it can help explain why individuals, communities and institutions sometimes fail to make decisions that maximise collective welfare. These insights can inform the design of more effective development policies, institutions and incentive structures, particularly in areas such as public investment, resource management and collective action. Integrating behavioural insights into development strategies can help address not only material constraints but also the psychological and institutional barriers that influence economic decisions, ultimately contributing to more inclusive, efficient and sustainable development outcomes.