Introduction

For a long time, economists viewed individuals as perfectly rational beings, capable of maximizing their utility or profit through optimal use of all available resources.

In the 1970s, a new approach emerged: behavioural economics, which, by focusing on psychology and the emotions behind people's decisions, revealed that human behaviour often falls far short of the ideal rationality assumed in classical economics. Psychologists Daniel Kahneman and Amos Tversky, and economist Richard Thaler, were pioneers in this field. Kahneman and Thaler even received Nobel Prizes in Economics.

Kahneman, in particular, studied the so-called behavioural traps – mental shortcuts, or heuristics, that influence our decision-making processes. He explained them using a powerful metaphor: imagine your brain as an elephant guided by a little rider. The elephant symbolizes our instinctive mental processes – driven by emotions and biases – while the rider represents our logical thinking, trying to steer the elephant.

The elephant is strong and grounded, making the rider's (i.e., rational thinking's) job challenging. Every decision becomes a small battle between intuition and logic, instinct and rationality. Our brain tends to simplify decision-making by using 'shortcuts' to navigate the numerous options we face. However, these shortcuts aren't always the most effective for making the best or most self-serving decisions.

What can we do to strengthen the 'rider' within us and help guide the elephant when necessary? We can start by learning to recognize the most common behavioural traps. Though they are deeply rooted – shaped by hundreds of thousands of years of evolution – we can at least identify and understand them when they sneak into our reasoning and try to minimize the errors they cause, especially in financial contexts.

Numerous studies and experiments have documented a wide range of common errors. Here, we focus on seven frequent mistakes we make in economic decision-making:

• present bias, which leads us to focus only on the immediate benefits of a decision without adequately considering its long-term effects;
• mental accounting, the tendency to divide our money into separate mental 'accounts', each with a different level of willingness to spend (also known as different spending tolerance), as if money had a different value depending on its origin (e.g., earned through work or received as an inheritance) or the context in which it is used (e.g., on vacation);
• naive diversification, which prevents us from properly applying the basic rule of investment diversification;
• framing effects, where our decisions are influenced by the 'frame' that is, the way information is presented to us (for example, emphasizing potential losses more or less strongly);
• overconfidence, which makes us overly sure of our knowledge or abilities, leading us to underestimate risks;
• representativeness, the tendency to make decisions based on similarities to familiar situations or stereotypes, instead of considering statistically more advantageous options;
• endowment effect, which leads us to overvalue something simply because we already own it, regardless of its actual market value.

We have dedicated a video to each of these cognitive traps, featuring real-life examples and experiments carried out with the help of students and citizens we met while exploring the streets of Venice.

Watch the introductory video and explore the full series!