Mental Balancing of Tradeoffs

Posted: 12 Dec 2009

See all articles by Sanjiv Erat

Sanjiv Erat

University of California, San Diego (UCSD) - Rady School of Management

Date Written: December 10, 2009

Abstract

The concept of tradeoffs, and how one may manage them, is one of the core issues addressed in much of operations literature. While much work has gone into answering how one should manage tradeoffs, there is significantly less understanding of how people actually manage them. Toward developing a positive theory of managing tradeoffs, the current article proposes that people, when faced with a tradeoff, employ mental balancing heuristic wherein they attempt to equate and thus minimize the “imbalance” between the costs/benefits associated with the specific tradeoff. Subsequently, the predictions of the proposed model are examined in three experimental studies.

The results show that a significant fraction of participants make tradeoff choices predicted by mental balancing heuristic. Furthermore, such choices do not arise from any intrinsic preference for the outcome that has balanced costs compared to one which has the least costs, but appear to emerge from participants’ false belief that the heuristic solution is the same as the normatively optimal cost-minimizing solution. Lastly, a novel experimental design offers a more direct examination of a participant’s decision-making process (i.e., how the participants arrived at their tradeoff choices), and it is shown that mental balancing has a predictable and significant effect.

Suggested Citation

Erat, Sanjiv, Mental Balancing of Tradeoffs (December 10, 2009). Available at SSRN: https://ssrn.com/abstract=1521870 or http://dx.doi.org/10.2139/ssrn.1521870

Sanjiv Erat (Contact Author)

University of California, San Diego (UCSD) - Rady School of Management ( email )

9500 Gilman Drive
Rady School of Management
La Jolla, CA 92093
United States

HOME PAGE: http://www.rady.ucsd.edu/faculty/directory/erat/

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