What is behavioural economics and how does our mind trick us?

Behavioural economics aims to understand how psychological, social, and emotional factors affect how people make decisions. Behavioural scientists acknowledge that people are not always perfectly rational in their decision-making (as typically assumed in traditional economic models). Instead, we often rely on mental shortcuts and our biases, emotions, and context influences how we behave.

6 biases that can affect decision making

This post describes six biases that could affect your farm management decisions. ‘Biases’ or ‘Cognitive biases’ are our tendency for systematic errors in our thinking that effect how our mind processes information.

Everybody is prone to these effects, but being aware of them can help you make the best decision in that situation. So next time that you are weighing up a big choice—be it a new seeding program, machinery upgrade, or marketing strategies—take a moment to consider whether your brain is tricking you.

1. Loss Aversion

We hate losing more than we love winning. That is why we hesitate to jump at an opportunity, because the chance of an upside reward is overshadowed by the risk of a loss.

For example, you may stick to planting a familiar wheat variety even if market data suggests that switching to oats could be more profitable this season.

Or, consider a grower who’s been using a particular fungicide for years. Recently, trials show that a cheaper alternative works just as well. But the grower sticks with the old product, thinking, “I’ve already spent so much on this brand over the years—I don’t want that investment to go to waste.” Even though switching to the cheaper alternative could save money, the fear of ‘losing’ keeps them locked into the old fungicide.

In this case, focus on future gains, not past losses. What is the best decision for future returns from this day forward?

2. Anchoring

Anchoring occurs when the initial information that someone receives (the ‘anchor’) disproportionately influences their decisions. This happens even if that initial piece of information is completely irrelevant or outdated!

For example, a grower decides to sow canola, because the market price was $950 per tonne last year. This year, the price drops to under $800, but your selling strategy is anchored on last year’s price. Perhaps you hold onto it in the hope that prices will go up again, incurring storage costs in the meantime.

To beat anchoring bias, regularly update the information that you use, and consult multiple sources.

3. Status Quo Bias

This is the tendency for people to prefer that things stay the way they are. Change feels risky, even when improved methods or technologies are available.

For example, you may have been using the same fertiliser program on your canola crop for the past couple of seasons. An agronomist suggests a different approach that could reduce your costs. But it feels risky to do so, so you stick with what you know.

Beat the bias, by trialling the new program on a few paddocks first, and compare the results of the season with previous years (correcting, of course, for soil, temperature, and rainfall each season).

4. Social Normalisation

We often take cues from what’s seen as “normal” in our community—even if that is not the best approach. Related to social normalisation is the ‘Bandwagon Effect’: People tend to follow what others are doing, even if it is not necessarily the best choice for them. Both effects come from our desire to fit in or to avoid being left out.

For example, trials have shown that faba beans can be a profitable crop in your region, but nobody around you are growing them. Not wanting to be the odd one out, you decide not to give faba beans a go.

Or you might feel pressure to upgrade machinery because others are doing it, not because it makes sense for your business. It is hard to beat social and cultural pressures. Nevertheless, make decisions based on your own goals, not on what is popular. Ask “What is the best for my farm? Is the decision based on solid data and advice, or on what everyone else is (not) doing?”

5. Confirmation Bias

Confirmation bias is our mind’s tendency to look for information that supports what we already believe—and ignore contradictory evidence.

For example, if you are convinced that a certain herbicide is the best, you might only read articles or talk to people who agree with you. You could miss out on better options or ignore warnings about resistance.

The best way to avoid confirmation bias is to challenge your own thinking. Talk to people with different views and look at a range of data before making the call.

6. Availability Heuristic

We tend to overestimate the importance of information that is readily available or recent in memory. The things that are easiest to remember influence our decisions, even if that recent memory is not necessarily the most accurate.

For example, your neighbour had a terrible crop loss from hail last year, causing you to overestimate the risk and spending big on insurance—even if the long-term data shows that hail events are rare in your area.

To avoid this, base decisions on long-term trends and statistical data, not on recent stories.

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For enquiries, contact RiskWi$e Behavioural Science team:

UWA Program Leader, Professor Marit Kragt: marit.kragt@uwa.edu.au

Post Doctoral Fellow, Dr German Puga: german.puga@uwa.edu.au

Communications & general assistance, Tammie Harold: tamara.harold@uwa.edu.au

For more information 

UWA behavioural science website: https://www.uwacaed.org/behaviouralscience

CSIRO's RiskWi$e website: https://research.csiro.au/riskwise/

GRDC RiskWi$e website: https://grdc.com.au/research/partnerships-and-initiatives/strategic-partnerships/riskwise