NATURAL DECISION-MAKING: IRRATIONALITY UNBOUND

Thinking, Fast and Slow is the best-selling book, published in 2011, by Nobel laureate Daniel Kahneman. The book distinguishes between two modes of thought. ‘System 1’ is fast, instinctive and emotional. ‘System 2’ is slower, more deliberative and more logical. In Judgment in Managerial Decision Making, Max Bazerman and Don Moore lay out a rational decision-making (thinking) process that superficially aligns to Kahneman’s System 2 model:

  1. Define the problem.
  2. Identify the criteria – what objectives are you seeking?
  3. Weigh the criteria – what’s most important?
  4. Generate alternative solutions.
  5. Rate each alternative on each criterion.
  6. Compute the optimal decision.

See? Easy isn’t it?

Let me give you an example of how this works.

A little while ago, we gave Mary’s (my wife) car to our younger son. We knew we needed another car (the problem). We wanted something new, small, reliable, good quality, cheap to run and fuel efficient (criteria). ‘Small’ was Mary’s strong preference (weighted criteria). I looked at all the popular mass manufacturers and identified a ‘top three’ (alternatives). After looking at their reliability, quality, running costs and fuel efficiency, we agreed on the best-selling small car in Australia at the time.

And …

And then we bought a German-manufactured, convertible sports car. It’s second-hand, small (two seats), reliable (so far), very high quality and not bad on fuel. As my mechanic pointed out, we dropped lucky, since not all second-hand cars of this type are necessarily smart buys. Is it cheap to run? Insurance is marginally more expensive, but regular servicing coupled to ludicrously high build quality and parsimonious sourcing of parts (not from its manufacturer) will keep costs down.

Eh?

What?

What happened to rationality?

Well, here’s the thing. The rational model is based on assumptions that prescribe how a decision should be made. They don’t describe how decisions aremade.

Another Nobel Prize winner, Herbert Simon, suggests that human judgment is bounded in itsrationality. He means that in thinking, the rationality of individuals is limited by the information they have, the cognitive limitations of their minds, and the finite amount of time they have for thought. Hence, rather than making optimal decisions assumed by the rational model, we simply search until we find a satisfactory solution that is good enough and suffices. Simon calls this ‘satisfycing.’

Yet another Nobel Prize winner, In persuasively arguing against ‘rational, economic man [sic],’ Richard Thaler, refines Simon’s ideas further. He argues that in thinking, our willpower is also bounded, in that we tend to give lesser weight to the future and more to the present. As such, our long-term interests are compromised by temporary motivations. Thaler further suggests that, unlike conventional economic actors, the majority of us care about the impact of our thinking on others; our self-interesttoo is bounded.

Bazerman and Moore add a further two bounds to rationality in thinking. Bounded awareness means that we tend to overlook information that is readily available, important and obvious, but which lies outside our immediate attention. Further, we may too be unaware that our ethics may be bounded.

The case against trying to understand thinking through studying what should be has been established for me over the past 35 years or more. Theory and practice I have encountered strongly suggest we can better understand thinking by describing and explaining actual decisions and thoughts. Prescriptive decision analysis itself is cognitively limited, because it assumes rationality. People aren’t always rational.They are irrational, especially in moments of truth.

Our, or rather my, irrationality in buying a German sports car? I had coveted this brand of car from my teens on. 40 years later, when I was looking for Mary’s car, I idly looked again for my ‘dream’ car and everything fell into place. My heart briefly ruled my head. I asked Mary what she thought. I gave her the information. We discussed it. I acknowledge the bounds on my thinking and decision-making. We love the car.

In this case, we had as much information as we wanted, if a little short on the operating costs of the sports car. We weren’t in a rush. It was a cognitive limitation that won out.

So when you’re making a decision, bear this in mind. By all means go through the logical process, but just be aware that your head might get in the way.