Investments in Human Capital to Remedy Decision-Making Errors

Abstract

With the rise of behavioral economics, we are becoming much more aware that we humans do not “naturally” make decisions like the rational beings depicted in neoclassical economics. We now know that humans regularly err in their decision making; humans are in Dan Ariely’s (2009) words “predictably irrational.” The purpose of this chapter is first to explore some of the main things we have learned or are learning about how the human mind often errs in economic judgment and decision making. The second purpose is to indicate what humans can do to remedy these errors. Such remedial actions are in effect investments in human capital (HC) as they raise human decision-making capability. The chapter focuses on both the most typical and important flaws in human decision making and a number of important ways that humans can avoid or reduce these errors. The approach taken here is to explore this subject utilizing only the contributions of a few key well-known authors.