Daniel Kahneman died a few months ago at age 90. Kahneman was awarded the 2002 Nobel Prize in economics – despite never having taken an economics course in his life. Kahneman was a psychologist and his life work with his research partner, Amos Tversky, a Stanford cognitive psychologist, was to understand how people make decisions in a complex world.
We’ve touched on their work in newsletters and blogs over the years whenever we’ve talked about decision making of any kind. Decision making, being something we do dozens of times a day across a wide array of issues . . . while assisting our clients as they face business decisions – including making the decision to reach out to Hopkins Centrich for legal advice.
A New Branch of Economics
Kahneman’s work established a new branch of economics – behavioral economics – but his focus was always on human judgment and decision-making.
The Harvard psychologist/author Steven Pinker describes it this way: “His central message could not be more important, namely, that human reason left to its own devices is apt to engage in a number of fallacies and systematic errors, so if we want to make better decisions in our personal lives and as a society, we ought to be aware of these biases and seek workarounds. That’s a powerful and important discovery.”
Kahneman’s books, Thinking, Fast and Slow, and Noise: A Flaw in Human Judgment explored not only the process of decision making but all the elements that combined (or conspired) to get in the way of a decision – or at least the right decision.
Thinking Fast and Slow
Kahneman’s first book, Thinking Fast and Slow, is a deep dive into improving one’s judgement and having a greater understanding of the decision-making process of, well, everyone: business rivals, allies, employees, clients, colleagues, judges . . . everyone,
Kahneman’s research revealed that the human brain uses two ‘systems’ for making decisions. ‘System 1’ is intuitive and relies on “rules of thumb” or “heuristics.” It operates automatically and quickly with little or no conscious effort.
System 2 is slower and requires conscious effort and attention. It is ultimately in charge and can resist the conclusions of System 1.
Kahneman explains that “most of what you think and do originates in your System 1 but System 2 takes over when things get difficult and normally has the last word.”
Think of it as the 2022 Astros: Dusty Baker, manager, decades of baseball experience, intuitive, was known to make moves based ‘on gut.’ The Astro’s back office deeply steeped in analytics provided the ‘conscious effort.’
There are individual biases and there is ‘noise’ – external things that just get in the way or exert – for no readily apparent reason(s) – outsized influence on a final outcome.
Noise is just that, unwanted and it gets in the way. It can also pop up unexpectedly in equally unexpected places. Like one of my favorite examples: Know how menu items now have the calorie count? Well, Kahneman and his team showed that it has a very real impact on how people order – but not as you may expect because it depends on where the calories are listed:
“When calories are on the left, consumers receive that information first and evidently think ‘a lot of calories!’ or ‘not so many calories!’ before they see the item. By contrast, when people see the food item first, they apparently think ‘delicious!’ or ‘not so great!’ before they see the calorie label. Here again, their initial reaction greatly affects their choices.”
Loss Aversion
Another, what we’d put as a kind of parallel problem in decision making is ‘loss-aversion’: the tendency to fear losses more than we value gains. One of Kahneman’s examples here: ‘loss-aversion’ explains “why golfers have been found to putt better when going for par on a given hole than for a stroke-gaining birdie. They try harder on a par putt because they dearly want to avoid a bogey, or a loss of a stroke.”
There’s a lot more, of course, for the behavioral school of economics is “based on exposing hard-wired mental biases that can warp judgment, often with counterintuitive results.”
We all have them. We are all subjected to noise, we are all inclined to let the noise rule our decisions. This affects us on a day-to-day basis. Hopefully, it’s for nothing more important than whether to order out or eat in.
When it comes to life and business-altering decisions, though, we all need to understand what’s standing in the way of making the right decision – be it in ourselves or noise from the outside or both.
Needless to say, when you own your own business, many business decisions have the potential to be life-altering, Loss aversion may kick in and you’ll consider – by far too much – to ‘good’ things you’ll lose while overlooking the great benefits of buying, selling, merging, hiring a COO, and a thousand other things.
And noise? Well, when it comes to your business, your emotions, actions, and decisions are influenced by the noise it produces every waking hour.
It's Hopkins Centrich’s job to help you cut through the noise on your way to a new life without it. We're very good at it.
We are here to help you work through the decision-making process.