From “Economic Man” to Behavioral Economics

When we make decisions, we make mistakes.

We all know this from personal experience, of course. But in case we didn’t, a stream of experimental evidence in recent years has documented the human penchant for error. This line of research is probably best known for its offshoot, behavioral economics. Its practitioners have played a major role in business, government, and financial markets.

But that isn’t the only useful way to think about making decisions. The academic arena alone contains two other distinct schools of thought, one of which has a formal name—decision analysis—and the other of which can be characterized as demonstrating that we humans aren’t as dumb as we look.

Each school of thought brings vital insights to bear. Managers need to understand when to make decisions formally, when to make them by the seat of their pants, and when to blend those approaches.

This article briefly tells the story of where the three schools arose and how they have interacted, beginning with the explosion of interest in the field during and after World War II and continuing to the present day, when companies such as Chevron have hundreds of decision analysts on staff. Its aim is to make readers more-informed consumers of decision advice—which in turn should make them better decision makers.

HBR Reprint R1505F