Defining the business of bad decisions
A botched effort to help with their older daughter's high school science project led to some self-recriminations by Miller's wife, Judy, played by Jami Gertz. Bill agrees with her about their high school academic failures as well as their shortcomings as parents, but he adds, “In our defense, we are very lazy people who tire easily.”
They aren't the only ones who are lazy and tire easily. We are all that way — or at least an important part of our brain is. Psychologist Daniel Kahneman's research indicates that laziness and effort avoidance are key characteristics of the analytical side of our thinking process.
Kahneman holds two professorships at Princeton University; one in the psychology department and one in the Woodrow Wilson School of Public and International Affairs.
During the 1980s, Kahneman and his friend and colleague, Amos Tversky published their work on prospect theory. Their psychological research dealt with decision-making under uncertainty and documented how certain measurable characteristics of our thinking processes lead to human errors. It was this work for which Kahneman was awarded the Nobel prize in economics. (Nobel prizes are awarded only to living recipients; Tversky died in 1996.)
Virtually all business decisions are made under conditions of uncertainty, and that is the reason behind Kahneman's long-standing interest in business. It is also the reason why managers should be acutely aware of his work and what it is telling us about the way we really make decisions.
In 2011, Kahneman presented the results of his years of psychological research in a book titled, “Thinking, Fast and Slow,” and it quickly became a best-seller. It is so rich in content, though, that it is not an easy read.
Kahneman is a gifted writer and is able to engage readers with a conversational style that manages to relate the facts and results of psychological experiments and research that captures our imaginations and fuels our desire for more. On the other hand, a substantial part of the book involves what he calls, “System 2,” the analytical side of our thinking process. And that, as he points out, requires effort — and we tire easily.
In our two principal modes of thinking, he writes, “System 2 allocates attention to the effortful mental activities that demand it, including complex computations.” It is slower than System 1, but it is able to “construct thoughts in an orderly series of steps.” It establishes explicit beliefs and is capable of rational analysis and logical conclusions. It is the brains of the outfit.
System 1, by contrast, is the more action-oriented, “just do it” side of our thinking. Instinct, habit and instant recognition of signals and patterns play a big role in System 1 thinking and allow quick responses.
While the two systems are not at all alike, they are, without doubt, totally dependent on each other. Without System 1, System 2 would be dead — literally, in some situations, for it is System 1 that provides our personal security and defense mechanisms. It recognizes dangerous situations, and dangerous people, in time to react. System 2 is more of a “let me think about that” type.
Without System 2, though, System 1 would never correct its bad judgments. It would just keep making the same mistakes over and over again.
Despite the fundamental differences, there is no hostility between the two systems. Instead, they would remind us of two brothers or sisters, each so very different from the other but bonded so tightly they can seem as one.
The relationship between the two systems is the heartbeat of Kahneman's book. Revealing how each works, and works with the other, provides the key to understanding so many of our successes and our failures.
It is challenging to find a chapter, or even a page, in this book that does not apply to our lives in business. Whether we are workers, supervisors or managers, we all have an interest in running our business so that it survives and prospers. Understanding the thinking process behind both good and bad decisions gives us the key.
Businesses rarely make a single decision that gets them into serious trouble. It is almost always a series of bad decisions, and often there is a pattern to these decisions that ensures their failure. “Thinking, Fast and Slow” gives us just the kind of understanding we need to examine our decision-making in a way that will help us get it right more often.
James McCusker is a Bothell economist, educator and small-business consultant. He can be reached at email@example.com.
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