Decision Making

This text is based on: “Thinking fast and slow” by Daniel Kahneman.

My only regret is that I this book was not published years ago and that I did not benefit earlier from the remarkable observations of the author, reason why I want to share this with you and the students of UBI in Brussels who follow my course on DECISION MAKING. “This book is a tour de force by an intellectual giant; it is readable, wise and deep. Buy it fast. Read it slowly and repeatedly. It will change the way you think, on the job, about the world, and in your own life.” (Richard Thaler, professor of behavioural science and economics, University of Chicago, co-author Nudge

The DECISION MAKING PROCESS is based on two systems, the first one is the intuition and the second one is the analytical part of the decision making process.

SYSTEM 1 operates automatically and quickly with little or no effort and no sense of voluntary control. It includes the innate skills we share with other animals.

SYSTEM 2 allocates attention to the effortful mental activities that demand it, including complex computations. It requires attention and effort. System 1 does the fast thinking & the effortful and slower system 2 – which does the slow thinking – monitors system 1 and maintains control as best as it can within its limited resources. However, system 2 is not a paragon of rationality. Its ability is limited and so is the knowledge

to which it has access. When system 1 runs into difficulty it calls on system 2 to support more detailed and specific processing.

Based on above, we underline a few considerations by the author. It is natural for system 1 to generate overconfident judgements because confidence is determined by the coherence of the best story you can tell from the evidence at hand. Therefore your intuitions will deliver predictions that are too extreme and you will be inclined to put far too much faith in them.

When people believe a conclusion is true, they are also very likely to believe the arguments that appear to support it, even when these arguments are unsound. The extend of deliberate checking and search is a characteristic of system 2 as system 1 provides impressions that often turn into believes and is the source of impulses that often become your actions. Good decisions often fail by lack of motivation and…high intelligence does not make people immune to biases! The sense making machinery of System 1 makes us see the world as more tidy, simple, predictable, and coherent that it really is. The illusion that one has understood the past feeds the further illusion that one can predict and control the future. These illusions are comforting. They reduce the anxiety! The author underlines various illusions such as skills, educated guesses, the ignorance of one’s own ignorance, forecasting ability,…

Note that EXPERTISE depends essentially on the quality and speed of feedback, as well as on sufficient opportunity to practice. Evaluating expertise means considering whether there was an adequate opportunity to learn even in a regular environment. Intuition is nothing more and nothing less than recognition. We are often wrong, and an objective observer

is more likely to detect our errors than we are. Luck plays a large role in every story of success! Besides, when faced with a difficult question, we often answer an easier one instead, usually without noticing the substitution. There are several ways human choices deviate from the rules of rationality. We focus on what we know and neglect what we do not know, which makes us overly confident in our beliefs. Both in explaining the past

and prediction the future, we focus on the causal role and skill and neglect the role of luck. We are therefore prone to an illusion of control. This underlines the concept that a reliable way to make people believe in falsehoods is frequent repetition because familiarity is not easily distinguished from truth. Authoritarian and marketers have always known that fact! Very little repetition is needed for a new experience to feel normal.

In addition to above mentioned considerations related to decision making, we tend to exaggerate our ability to forecast the future, which fosters optimistic overconfidence. Optimism is a state of mind, often inherited! More often optimism leads to underestimate the odds they face and do not invest sufficient effort to find out what the odds are. “The evidence suggests that optimism is widespread, stubborn and costly!” Whenever you form an evaluation of complex object, you assign weights to its characteristics. The weighting occurs whether or not you are aware of it; it is an operation of system 1. The weights are certainly correlated with the probabilities of the outcomes. The more probable an outcome, the more weight it should have

Read this: overestimation of intuition and underestimation of what we need for the analytical part of the decision making process will result in IRRATIONAL PERSEVERANCE! To finalise this short blog, let me provide with three quotes from M. Daniel Kahneman: “An inability to be guided by a healthy fear of bad consequences is a disastrous flaw!” “When you specify a possible event in greater detail you can lower its probability.” The author’s conviction is that luck plays a major part in the success related to the decision making process as well as the fact that; “Our comforting conviction that the world makes sense rests on a secure foundation which is our almost unlimited ability to ignore our ignorance.”

Roger Claessens, Remich, Luxembourg, 22/04/2012