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Sunday, 4 June 2017

How Do You Come To a Decision? Are You Rational or Emotional?

I have been listening to a remarkable book called The Undoing Project by Michael Lewis, the author of, among others, The Big Short.  The Undoing Project traces the cooperation between two brilliant and extraordinary Israeli psychologists, Dr Daniel Kahneman and the late Dr Amos Tversky.

They worked together on the psychology of judgement and decision making as well as well as what they called, behavioural economics, for which Kahneman was awarded the 2002 Nobel Prize for Economics, three years after the death of Amos Tversky.

It was their work on decision making that I found fascinating.  The two academics were both brilliant and quite different in their approach.  Tversky’s work was very much angled towards the mathematical basis of psychology while Kahneman was more interested in exploring the reasons that people make decisions.

One area that they developed during the 1970s was the theory that many decisions are made based on regret, that is, if I do this then if I am wrong then how much will I regret what I did?

Take the simple example of the Post Office queue.  You are in long line and you notice that there is only one person in the line alongside.  You decide to move there only to find that the person being served has a big problem and it is taking all the time in the world to solve it.

Meanwhile, the line you have just left has moved quickly and you have missed your slot by transferring.

At this stage regret kicks in.  Why was I so stupid as to move?  If I hadn’t moved I would have been served and out by now.  Why I am so impatient etc?

In my consulting days I used the decision tree model that involved defining the problem and then identifying all the possible options needed to solve it.

Taking each option in turn it was possible to assess the financial effect as well as the potential disruption and then compare each one in order to come to a rational decision.

I am neither an economist nor a psychologist although I find both subjects fascinating and compelling.  The downside is that each can use classic questioning models to unearth possible outcomes and then accept that there will be an acceptable margin of error in the final results.

However, this margin of error is seldom mentioned and most results are published as the final outcome when in fact they can alter significantly.  Just take a look at about every poll that has been taken in about every election, here and in the USA, that have been wildly out of kilter with the actual results.

The bald facts are that tests with a group of selected people, however scientifically designed, are merely opinions at that stage of asking.  They can and do vary in the real world.

It is usually an irrelevant, emotional response that overlays the rational and that cannot be measured in any scientific way.  However, if it is, as Dr Steve Dr Peters would affirm, the chimp brain speaking then we have to accept that the chimp is five times as powerful as the rational.

If that is the case then we need to take the “results” of laboratory testing of humans with more than a grain of salt, perhaps more of a good handful.

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