My fascination with the psychology of decision-making continues. My latest sage is Daniel Kahneman, a leading psychologist and winner of the Nobel Prize in economics for prospect theory. Kahneman has dedicated his life to researching human judgement – especially under uncertainty and whether people are susceptible to flawed intuition. His book, Thinking, fast and slow summarizes much of his research. The book explains why humans make errors of judgement, and the role of systematic bias. It has many examples of the way people ignore general facts if they conflict with personal experience.
Two systems of thinking
Just like the red and blue model created by Dr Ceri Evans, Kahneman argues humans have two systems of thinking — System 1 (Thinking Fast), and System 2 (Thinking Slow). System 1 is the spontaneous,‘gut reaction’ way of thinking and making decisions. System 2 is the analytical, ‘critical thinking’ way of making decisions. System 1 develops ‘first impressions’ and often is the reason why we jump to conclusions. System 2 is about contemplation, problem-solving, and analysis.
System 1 is our default position
Most of us like to think we are considered and rational, but many of us operate predominately in the System 1 position. Our intuitive brain functions most of the time and tends to guide most of our actions and decisions. Our intuitive brain (system 1) is emotional, powerful, fast and is easily influenced.
Our more logical brain (system 2) usually kicks in when something unexpected arises, but generally, it seldom activates and can switch-off when we become tired. Without the caution and in-depth analysis available to us in system 2, we often make mistakes or errors of judgement.
Trying to overcome our intuitive brain's flow (e.g. to overcome our natural bias), leaves us feeling uncomfortable and uncertain even after years of trying. We feel more satisfied and more at ease if we adopt our intuitive flow.
WYSIATS - What you see is all there is
WYSIATI stands for ‘what you see is all there is.’ The acronym refers to the notion that we normally make our judgements and impressions according to the information we have available. Kahneman writes extensively about the WYSIATI state and how people jump to conclusions based on limited information. In general, we don’t spend too much time thinking ‘there are still many things I don’t know.’ Simply, we make a decision on what we do know.
Errors of judgment when we rely on System 1 thinking
Kahneman describes many ways our System 1 thinking can affect our decision-making. I have summarised a few scenarios that I have seen play out in business and life.
Law of small numbers: People don’t understand statistics very well. As a result, they may look at the results of a small sample and determine that they are representative of the population. This theory also explains why people jump to conclusions with just a few data points or limited evidence.
Hindsight bias: People will reconstruct a story around past events to underestimate the extent to which they were surprised by those events. If an event does happen, people exaggerate the probability that they knew it was going to occur. If an event does not happen, people falsely recall that they thought it was unlikely.
“What hindsight does is it blinds us to the uncertainty with which we live. That is, we always exaggerate how much certainty there is. Because after the fact, everything is explained. Everything is obvious. And the presence of hindsight in a way mitigates against the careful design of decision-making under conditions of uncertainty.” Kahneman
Confirmation bias: People will be quick to seize on limited evidence that confirms their existing perspective. And they will ignore or fail to seek evidence that runs contrary to the coherent story they have already created in their mind.
Overconfidence: Due to the illusion of understanding and ‘thinking how they see’, people may become overconfident in their predictions, judgments, and intuitions.
“We are confident when the story we tell ourselves comes easily to mind, with no contradiction and no competing scenario… A mind that follows WYSIATI will achieve high confidence much too easily by ignoring what it does not know. If is therefore not surprising that many of us are prone to have high confidence in unfounded intuitions."Kahneman
Overcome the System 1 position with data analytics for business
Thinking, fast and slow implies there is no simple answer to this inherent flaw in our thinking and takes a great deal of effort to change. As Kahneman points out, there may be situations where it is better to rely on computations based on mathematical formulas rather than attempt to overcome our intuitive thinking.
This is where simple-to-use data analytics software might help counter system 1 thinking. Tools like Phocas can help inform the intuitive decision.
Business-people make gut decisions and hope that they succeed. But often they don’t and instead are faced with bad outcomes such as a new branch they should not have opened or deadstock no one wants to buy.
Another good example is the profitability of customers. Many business owners tell us, by using Phocas and tapping into multiple sources of information about a customer they have discovered their top customers are not always who they thought. They are shocked and initially don’t want to believe the numbers because they have worked with these people for years, they are loyal, and they are friends. But in fact, they are losing money on these customers because the business has not taken into account the high cost to serve them. They did not have a full picture of the data about the customers.
Phocas provides the unbiased rigour around business data and helps people validate their decisions so they can transition into System 2 thinking.