Working With Rational Decisions And Cognitive Biases

Have you ever heard of the theory of system 1 and 2, and of Daniel Kahneman? No?

Neither did I, until I saw the BBC program Horizon, and found out that humans are programmed with over 150 (!) different cognitive biases. All this time, I thought that humans make rational decisions at work (you too?). As it turns out: Not really, and certainly not all the time.

System 1 and System 2

The BBC program explains that, although we believe to be very rational beings who make (large) decisions deliberately, much of that decision making is done by an autopilot function of our brains. Daniel Kahneman calls this system 1. According to Kahneman, system 1 makes most decisions in daily life, and it does so in a fast, intuitive and emotional way. System 2, however, contains our self-awareness, and allows us to think rationally on a slow (compared to system 1), deliberate and logical manner. All well and good, but what we generally fail to see, is that it’s not system 2 that takes care of the majority of our decisions – it’s really system 1. System 1 eases the decision making process by activating cognitive biases. As a result, we make a lot of decisions based on prejudice rather than taking all available information into consideration – even at work. Of course, no one wants to hear that he or she has come to a wrong decision due to a certain bias.

The anchoring effect

An example from the BBC program: As an experiment, passersby are asked to estimate the price of a bottle of champagne. However, prior to that estimation they have to draw a ball, eyes closed, from a bag with table tennis balls. Each ball contains a number: For the first group of people in the experiment this is number 10, the second group has number 65 (all balls have a 10 or 65 on it, a fact unknown to the participants). Then, when the participants are asked how much the bottle of champagne costs, the first group – who had drawn the tennis balls with number 10 – provides an estimation of around 10 pounds. In the second group, the estimation lies much higher, and around 65 pounds. This is called “anchoring“: Although people have seen a random number just before, that number is still anchored (in system 1) and forms the basis for the requested estimation. Thus, not such a rational estimation after all!

Rationality at work (or lack thereof)

A few cognitive biases which can affect rational decisions at work:

  • Status quo bias: Humans do not like change, so many decisions are (not) taken to maintain the status quo. With this in mind, it’s not surprising that 70 % of planned organizational changes fails. Or, is this 70% a form of confirmation bias, and a number that is mostly repeated by the consultancy firms that are confirming their own biases [NL]?
  • Framing effect: Depending on how or by whom certain information is presented, one draws a different conclusion. When a colleague you don’t really trust shares important information with you, you treat this information differently than when your best friend/colleague would be sharing that same piece of information.
  • Pro-innovation bias: The belief that an innovation is suitable for the whole society and can thus be implemented everywhere. In the case of the “nuclear optimism” of the ’50s, we have come back from this (bias). Looking at Google ‘s innovative drive it’s still a wait and see how this bias turns out for us.
  • Social comparison bias: The tendency to hire candidates who pose no threat to our own strengths. Although this may contribute to the diversity of employees within a company, it can also hurt business results when it means that less suitable personnel is being adopted.

“In economics, money illusion, or price illusion, refers to the tendency of people to think of currency in nominal, rather than real, terms. In other words, the numerical/face value (nominal value) of money is mistaken for its purchasing power (real value). This is false, as modern fiat currencies have no intrinsic value and their real value is derived from their ability to be exchanged for goods (purchasing power) and used for payment of taxes.”

 

Could this be the cause of our current financial crisis?

(For more cognitive biases, see for example businessinsider.com)

Remedy

The remedy? There is none! There is no magic bullet to fight decisions based on cognitive biases. Simply because system 1 also occurs with monkeys, meaning it has been developed and passed on through our evolutionary process, and a system of about 30,000 years cannot just be moved to the side. As is recommended in the BBC program, the best solution is to come up with some “tricks” to prevent cognitive biases from occurring. For example, the framing effect can (mostly) be prevented by thinking about issues in a different language, “because a foreign language creates a greater cognitive and emotional distance than one’s native language does” [translation PS]. More generally, Louise Rasmussen advices to seize surprises as moments to learn something: “When you feel that something didn’t go exactly as you expected, consider that you need to refine some hypotheses about how things are working.”

Incidentally, these cognitive biases are no issue at all for people in sales and marketing, and they make good use of them to sell products and services. But you knew that already, right?

 

A similar blog post has been published on feedbek.nl [NL]

 

Photo Credit: “lapolab” via Compfight cc

I started blogging mainly because of my interest in organizational cultures and (online) communications. Over the years it has become my passion to help professionals and entrepreneurs build their dreams, accelerate their results, and create richer, more miraculous lives.

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