15 Oct Thinking Fast and Slow: The Ikea Effect and Decision Making
In Daniel Kahneman’s book “Thinking Fast and Slow”, the world’s foremost authority on decision making explains that in order to avoid overheating and wasting valuable energy, our brains have evolved short-cuts for repeat decisions. These heurisitics are made by completely bypassing our conscious thinking process: they are fast thought. When finding oneself under attack by a tiger, it makes sense to act quickly to increase adrenalin flow and reduce bowel contents rather than hanging around to see how many innovative options the conscious thinking process can produce.
In other words the brain is often predisposed to be as lazy as possible. Whilst this is bad news for proponents of free will it is great for marketers who love to think they can take advantage of our innate heuristic algorithms. It is also a very useful system for functions like driving on a motorway for three hours or reading the children a bedtime story where you can let your unconscious brain deal with a routine process and at the same time use your slow thinking brain to mull over thorny problems like where to go on holiday next summer.
How are business decisions made?
So which system do we use when making really important but difficult decisions about future strategy in conditions of uncertainty; fast thinking or slow thinking? Which system do we use when we have impartial, conflicting and inconclusive evidence like making choices about who to hire?
Whilst we like to think that we use our slow conscious intelligent thinking for decisions like hiring or future strategy, Kahneman shows that we use far more of our fast thinking brain than we would like to admit. He shows that many of our decisions only really have a rationale after they have been made and that we show a number of complex biases which have very little to do with any true rationality.
This obviously has huge implications for economics which for much of its chequered history has argued that humans make rational choices. The laws of pricing for example do not follow some Newtonian set of absolute principles – lowering a price does not necessarily increase demand because our biases may infer that that something going down in value is less desirable.
Types of biases which affect business leadership strategy
So what are these biases, how many are there and what can we do about it? There is a great list on Google (included on the list is the Google Bias – the inability to bother to remember anything which you can find on Google). Here are some of the classic ones – it could be good fun to wheel them out in your next heated debate when faced with a sticky decision:
- Confirmation Bias – the tendency to search for, interpret, focus on and remember information that confirms ones pre-conceptions.
- Framing Effect – Drawing different conclusions from the same information depending on how or by whom that information is presented.
- Illusion of Control – The tendency to over-estimate one’s influence over external events.
- Information Bias – The tendency to seek information even when it cannot affect action.
- Endowment or Sunk-Cost Effect – the perception that the loss of value is greater when giving something up than it cost to acquire the object the first place.
- Neglect of probability – the tendency to completely ignore probability when making a decision under conditions of uncertainty.
- Planning Fallacy – The tendency to underestimate time to complete a planned project.
- Social Comparison Bias – the tendency, when making hiring decisions, to favour potential candidates who do not compete with one’s particular strengths.
- Halo Effect – the tendency for a person’s good or bad traits to spill over from one personality area to other areas of their perceived personality.
- Cryptomensia – a misattribution when a memory is mistaken for imagination because there is no subjective experience of it being a memory.
There is a whole host of others and of course many of them interact with each other to form the wonderfully chaotic process that is human thought and action!
Even successful businesses can miss the big picture
Moving on from this to the larger topic of how companies behave in similar ways brings me to my favourite read at the moment – “The Innovator’s Dilemma”. This is an account of how highly rational, intelligent and successful management teams and cultures develop such efficient heuristics and biases that they become institutionally incapable of seeing the big picture. Typically their sales forces are so plugged into the right high margin markets and are so good at feeding back the right information for incremental product development that they fail to see that a new low-cost, low margin, high volume product will wipe out their entire market just as they are having their greatest success.
This book is the intellectual underpinning of the tech world’s adulation of the term “disruption”. The speed of change is faster than ever and this throws up endless difficult and pressured decisions. There are so many companies today that are examples of this process as digital disintermediates and remove barriers to entry whilst fundamentally changing the way a company interacts with and gains insight into its customers. If you are very clever and have enough biases in place you can argue that none of this is going to happen to you…but with the bias of hindsight you will probably be wrong.
How can the business decision making process be improved?
So what can the modern decision maker do now that he or she realises that their decision making process may be fundamentally flawed. Well, we hope that anyone senior reading this article already knows 80% of this and they are fully self-aware about how flawed their decision making process can be.
So firstly the best cure for rampant bias is to pick up a nasty gambling habit. Here you will find the incontrovertible and painful truth that you are not capable of influencing the future by making irrational generalisations of past events or by making decisions on a skillful hunch. Gambling in controlled environments (this probably doesn’t apply to the nags!) teaches the counter-intuitive skills of probability and taking risks in an intelligent way. Basically everyone should play more poker and backgammon.
Secondly you can rejoice in the fact that the best way to do digital is not to make any decision other than to have an agile methodology where product is tested in the market place and some very clear numbers come back to support or destroy a business case. In other words, like gambling, come up with a strategy for minimising the downside risks and maximising the upside.
Thirdly you have to remember that whatever product or service you provide now will be marketed and delivered in a different shape or form sometime in the future. Are you going to be doing that or is it an unbiased startup sitting in a garage around the corner who is luck or by plan closer to the customer?
Finally I have to admit that I am now suffering the Ikea Effect – the tendency for people to place disproportionately high value on objects they have partially assembled themselves regardless of the quality of the end result.