Week 1- Rational Actor Paradigm (RAP)

Question 1

What is the art of business?

Answer 1

to identify assets in low valued uses and devise ways to profitably move them to higher-valued uses

Question 2

What does the rational actor paradigm state?

Answer 2

1) people act rationally, optimally, self interestedly.

This means that people don’t make systematic mistakes, they are usually trying to do the right thing but they are influenced by incentives. Therefore to change behaviour you must change incentives

Question 3

What are the reasons for why an employee would make a mistake while making a decision, according to the RAP?

Answer 3

1) lack of information

2) bad incentives

Question 4

what are the questions you must ask before diagnosing a decision making mistake?

Answer 4

1) Who is making the bad decision?
2) Do they have enough information to make the right decision?- Are they qualified enough for the job?
3) Do they have the right incentives to make the best decision?

Question 5

what are the solutions to a decision mistake?

Answer 5

1) let someone else, with better info or incentives, make the decision
2) give more information to the current decision maker eg. interns are often not given that much info
3) change the decision-makers incentives