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How People Make Economic Decisions


Decision-making is a challenging exercise, not only in business management (business decision making) but also in making decisions that involve personal or individual choices. According to Steve (2006: 62), decision making has always been and will always be a complex process and which requires the decision-maker to possess adequate skills & knowledge so as the latter can be able to make what can be referred to as rational or appropriate decisions. In one’s personal life, just like it is the case in organizations, an individual is presented with very many decisions that he or she is bound to make and which have a direct impact on his or her life. Among the crucial decisions that individuals make on daily basis and which greatly impacts on their daily life are the economic decisions (Jasmin, 2002: 17). According to Steve (2006: 67), individual financial health depends on the quality of the economic decisions that he or she makes. A wrong economic decision, whether made by an individual or a business manager is bound to haunt the decision-maker, as the negative on the latter’s financial health is inevitable. As a result, an accurate approach coupled with the optimal level of skills must be adopted when making economic choices in order to avoid fatal mistakes in this serious area (Jasmin, 2002: 17). This paper, therefore, reviews ways in which people make economic decisions.

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Economic Decision Making

According to Jasmin (2002: 17), well over 65% of individuals do not possess adequate economic decision-making skills, irrespective of the important nature of such decisions in their life. According to the latter, irrespective of the fact that efficient market theory to economic decision making indicates individuals are supposed to be always logical when making economic decisions, reliable research indicates that close to 67% of people seldom use decision-making logic when making such decisions. As such, they end up making the wrong decision. While in the long term the efficient market theory can work, the latter is totally inefficient in the short-term or rather in personal life since the decision making is likely to be affected by the psychological and emotional factors thus erasing the logic in the decision making process. The result of this influence is probably making wrong decisions. According to research conducted by Princeton psychologists (Jasmin, 2002: 13), it was found out that those negative emotions make them not think logically, which has direct negative effects on economic decision making.

Economies are multifaceted and the economic policies that an individual makes may not at all times translate to the desired results (Steve 2006). As a result, the highest level of sobriety on the part of the decision-maker is crucial for successful economic decision-making. According to Steve (2006: 68), effectiveness in decision-making in most cases translates to economic success. Although being poor or rich is not always a direct result of the quality of the economic decisions that an individual makes, it plays a major role in the latter. The rationality theory approach to economic decision-making is an approach in which individuals are assumed to make decisions that will help optimize the benefits obtained hitherto (Jasmin, 2002: 12). As a result, an individual will aim at choosing a combination of economic choices that presents him or her with the best results or benefits.


Economic decisions always revolve around cost. Individuals, therefore, make an economic decision based on the cost that the decision is likely to come with it. In addition, an individual’s needs are multifaceted hence they cannot be all met by the amount of money that one has. For instance, if an individual has a disposable income of $100 and he wants to buy three units of item A each costing $25 dollars and two units of Item B each costing $20 dollars, it is vital that the latter revise his economic decision to spend his income (since the money fall short of the total cost of the items he wants) in order to succeed. The decisions that he will make here therefore must be guided by the opportunity cost since he will have to forfeit buying certain units. People make decisions that in one way or another pleases them most. Rationality in economic decision making therefore will mean individuals making decisions that optimize their happiness. For instance, if an individual wanted to have more money, he will have to think of having to work harder or for longer hours. Ideally, the decision that the latter finally make will be based on the comparison between the desire to have more income and the cost of having both works. In addition, the craving to fulfill one’s desires makes economic decisions making highly responsive to incentives. This is because such incentives create a notion in the mind of the decision-maker that he is bound to benefit thus influencing a certain course of action.


Jasmin, E. (2002). Effective Communication and Decision-making in Diverse Groups p1-23. 2009. Web.

Steve, B. (2006). The Secrets of Effective Decision making inc. The journal of business management Vol. 12 No. 1.

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StudyCorgi. "How People Make Economic Decisions." October 29, 2021.


StudyCorgi. 2021. "How People Make Economic Decisions." October 29, 2021.


StudyCorgi. (2021) 'How People Make Economic Decisions'. 29 October.

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