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Making better decisions – in business and in life – is one of the top goals for many people. On this episode of In The Arena, Anthony interviews author and professor Steven E. Landsburg, a global expert in economics, philosophy, and the science behind rational decision making. Steven and Anthony dig into why people make poor decisions and rationalize them afterward, as well as seek out the answer to why people are irrational in predictable ways. You’ll hear insider information behind the thought experiments in Steven’s latest book, “Can You Outsmart an Economist?” and it’s an episode not to be missed. Listen now!
Thought experiments such as this one demonstrate how people make rational, or irrational, decisions
Steven’s newest book is full of logic puzzles that are sure to entertain and educate. He and Anthony walk through one on this episode. Let’s say you have 2 urns, each filled with black and white balls. The first urn is filled with 70% white and 30% black balls. The second is filled with 30% white and 70% black balls. You pick one of the urns at random, pull out 12 balls, and 4 of them are white while 8 are black. Which urn did you select from?
Most people decide that they were 40% likely to pull from the predominately white urn and 60% likely to pull from the predominately black urn. However, the most rational conclusion is that you had a 98% chance of pulling from the predominately black urn. Why? Be sure to listen to this episode for the full explanation.
The key to making better decisions lies in understanding our own biases and downfalls
Steven has learned through decades of research that most people are irrational, but that they’re irrational in predictable ways. People have a habit of simply “going with their gut” and not evaluating all of the options. Steven encourages people to think smarter about their decisions, and by starting with this question, you can be well on your way to becoming a more rational thinker. Ask yourself, “Do I have any reason to trust my own opinion more than the opinion of someone else, who has been thinking about this problem as hard as I have?” This question can shed valuable light on questions you’re asking about real estate, finances, sales, marketing, and more. If you always suspect that people think differently than you do when it comes to big decisions, you can be better prepared to consider the viewpoints you might have otherwise overlooked.
The obvious answer to a problem isn’t always the best answer
So many people revert to the most obvious answer to a statement. They fall into a trap of going with the first explanation that comes to mind, but Steven and Anthony counter this tendency on this episode. Steven outlines an example scenario, based on systems that allow students to rate their professors on their ability to teach well. Studies have shown that good-looking professors almost always score higher than average-looking professors. Many people would conclude that it’s because students are simply shallow and that they only notice looks.
However, Steven offers the idea of good-looking people who choose to be professors are inherently better at teaching than average-looking counterparts. This could be because of the multitude of additional career opportunities for good-looking individuals (acting, modeling, etc.). Thus, great-looking people who choose to teach may be exceptionally interested in the craft of teaching, and therefore do it exceptionally well. This method of deductive reasoning may not be common, but you can hear more about it on this episode of In The Arena.
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Outline of this great episode
- Are people rational, and do they make rational decisions?
- This thought experiment can demonstrate how people make rational, or irrational, decisions
- Making rational decisions isn’t as easy as people are led to believe
- This thought experiment explains why certain groups have more political clout than others
- The obvious answer to a problem isn’t always the best answer
- Final thoughts from Steven on students, teaching, and college admissions
Resources & Links mentioned in this episode
The theme song “Into the Arena” is written and produced by Chris Sernel. You can find it on Soundcloud
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