Introduction to Behavioral

heuristic
approach to decision-making. The term ‘heuristic’ means that people use simple 
‘rules-of-thumb’, often unconsciously, in order to make decisions when there is a lot 
of information involved, much uncertainty, and a realistic time constraint. Thus we 
may have a personal rule always to pay by cash for purchases of less than $100, even if 
we have a credit card handy. Sometimes this can result in inconsistent or incoherent 
behavior, as we will see shortly, particularly in the various examples of preference 
reversals. What can be said at this stage is that bounded rationality is not concerned 
with optimality, or even sub-optimality; the heuristics involved in the decision-making 
processes of bounded rationality are more related to ‘
satisfi cing
’.
What about cases where we misjudge what is in our self-interest even according to 
the more forgiving criterion of bounded rationality? Such instances tend to relate to 
the infl uence of ‘self-serving’ biases, discussed in Chapter 4. An often-quoted example 
of 
self-serving bias
is the ‘above-average’ effect: well over half of survey respondents 
typically rate themselves in the top 50% of drivers (Svenson, 1981), ethics (Baumhart, 
1968), managerial prowess (Larwood and Whittaker, 1977), productivity (Cross, 1997) 
and health (Weinstein, 1980). Some economists and psychologists would claim that 
such acts are irrational.
We can now move on to the third concept; the term ‘self-interest’ also lends itself 
to different interpretations. Economists have traditionally measured this concept in 
terms of utility, where utility is a measure of subjective value. With the formalization 
of rational choice theory in economics, it assumed a technical shorthand for underlying 
preference orderings that obey the rationality axioms. 

---

9
N AT U R E O F B E H A V I O R A L E C O N O M I C S
CH
•
1
There is another aspect that merits discussion in this context. Arguably, actions 
where no deliberation is involved, sometimes called instinctive, are neither rational 
nor irrational. These actions tend to occur on the spur of the moment, like ducking a 
fl ying object likely to cause harm. Such actions are sometimes referred to as