While watching The Bachelor this week, the bachelor, Peter, was faced with a decision on whether or not to give a girl a rose. Peter, was faced with a classic case of decision-making under uncertainty. Peter does not know the exact risk and probability of a relationship working out with each contestant. He has to make a decision on imperfect information. Thus, he utilizes his internal expected utility function. Whenever a contestant does not fit his expectations, his expected utility for that contestant decreases (“girl, you are decreasing my utility”). Whenever a contestant makes Peter more confident in their relationship, his expected utility increases.
This is all good and rational, right? Maybe. By a normative model, Peter is profoundly irrational and dumb. Instead of making a purely logical decision, he is swayed by his emotions and social pressures by the contestants. Enter behavioral economics. When we incorporate bounded rationality and emotions into Peter’s expected utility equation, we would see that how he feels in the moment will skew or discount his view of his future (expected) utility. More so, a decision that conforms to the large crowd of contestants would help him avoid dis-utility. We can also argue that Peter not being able to make up his mind is attributed to him trying to calculate expected utility (incorporating emotion) from each decision and contestant. Yeah, that’s probably what’s going on in his mind.
Would You Like Some (Behavioral) Econ With That? 