I did a very brief summary of a review of research on irrational behaviors and why we make decisions that appear seemingly contradictory to our best interests or to “rational market forces”. I’m sharing this summary of the various decision-making concepts as entrepreneurs can definitely take away important lessons in how we work AND how our clients may decide. Source material: Tetlock, P. E., & Mellers, B. A. (2002). The great rationality debate. Psychological Science, 13(1), 94-99. Copyright is by permission of the © American Psychological Society.
1. Change v. States
We judge our gains and losses via our perception of status quo, not via an absolute scale (for example we compare our wealth with peers to judge whether we feel rich regardless of what we actually have).
2. Gains v. Losses
We don’t mind losing what we haven’t gotten but we hate losing what we already own.
The taxi driver example: instead of working more on “good” days to make more money, taxi drivers quit once they make that threshold dollar amount (example: “I expect to make $500 a day”) and then work longer day than the norm on a very “slow/bad” day. A rational approach would be to use an average (example: “I expect to make an average of $500 a day”) and then on good days work longer to make more $ and on slow days work about the same hours or shorter (example: day 1: $500 / day 2 $1500 / day 3 $100 / day 4 $400 / day 5 $0 [got mugged/got sick] = average $500 a day working about the same or even shorter hours)
3. One v. Several
Declaring loss hurts more than keeping a “paper loss” by keeping account open.
[I glossed over this one but it could use more substantive examples than keeping a losing stock example - I may come back to it.]
4. Narrow v. Broad Bracketing
We tend to evaluate and decide based on examining 1 item at a time versus overall picture (looking at the trees instead of the forest).
Example: When 25 divisional executives were asked to accept a project with 50% chance to gain $2M and 50% chance to lose $1M only 3/25 accepted the risk. On the other hand the company CEO was happy to accept 25 of these investment risks. This is because the divisional execs perceive the “trees” / small picture while CEO look at the “forest” / big picture. In the big picture, this is a smart calculated risk.
5. Inside v. Outside Views
We tend to decide based on self-centered analysis versus “objective” outside/situational analysis, risking overconfidence in how well our choice will play out.
Example: entrepreneurs entering excessive crowded market in spite of the market appearing saturated.
(Another example is me taking this class thinking “Of course I can handle it” while situational analysis all points to, “are you nuts?! You have no time!”)
6. Stable v. Constructed Preferences
This reminded me of the 1st concept where perception drives the decision. Preferences are made on the spot using current available cues versus weighing factors in the decision more absolutely.
Example: I need to buy a good, substantive music dictionary. If I am given individually a new looking dictionary of 10,000 entries versus a worn torn dictionary of 20,000 entries, I am more likely to choose the new looking product. On the other hand, if I am given BOTH (therefore I have a comparison) then I’ll pick the 20,000 entries option, which was what would better serve me because 20,000 entries > substantive than 10,000 entries regardless of appearance of delivery vehicle (appearance of the book itself).
7. Linear v. Nonlinear Decision
We tend to risk more when we think the probability to return is small. We tend to risk less when compare decision against a guarantee.
20% chance to win $4000 v. 25% chance to win $3200.
“I don’t have a good chance anyway, let me go for $4000″
80% chance to win $4000 v. 100% chance to win $3200
“I’m picking the sure thing: $3200 even if it’s less than $4000 and 80% is still a very good chance.”
8. Wholes v. Parts
This concept is about “unpacking a scenario” — the more details we gain around an event, regardless of the probability of these events, the more we will believe in the event happening — in other words we begin to add for ourselves the probability in our minds of this happening.
There may be a massive flood in N. America that will kill >1000 people.
There may be an earthquake that causes a dam to crack in California, causing a massive flood in N. America that will kill >1000 people.
“OH MY GOD! WE NEED EMERGENCY SUPPLIES!”
9. One v. Many Utilities
People use their experience in the “ending” of an event and decide on their feeling about this experience, instead of the good or bad of the experience itself.
Painfully cold water for 1 minute
Painfully cold water for 1 minute then less painfully cold water for 30 more seconds
people picked the 1.5 minute submersion in cold water just for that 30 seconds of “less painfully cold” (but it is still painfully cold! just less.)
This is part of my study notes for enrollment in Coursera’s A Beginner’s Guide to Irrational Behavior by Dan Ariely. This is my first time taking a Coursera course and I’m excited that I have picked the right one to begin this online learning experience! Of course, I also think taking this class, at this time in my life, given how many things I’m juggling on my plate, is completely irrational in and of itself….