Your brain is wired to think fast. So, to do this, it needs to take shortcuts, that psychologists call heuristics. But these shortcuts don’t always give the right answer. They give rise to cognitive bias.
Cognitive bias is the result of the shortcuts. If every car door you’ve ever encountered opens outwards, it’s a good bet that the next one you encounter will too. That’s a bias in your assumptions. Usually, it serves you well. One day, it may let you down.
But the cognitive biases that we need to worry about are those that are baked into our mental operating system. We make the mistakes without realising it. They lead to bad decisions – sometimes to catastrophe.
Systems thinking is a big idea that’s remarkably… simple.
It’s a simple idea about complex phenomena. And the principle virtue of systems thinking is that it reminds us that the real world is far from simple.
Indeed, when we try to apply simple solutions to complex problems, the solution tends to fail: often spectacularly. And it’s systems thinking that points us in the right direction. We need to think about the whole messy, complex, inter-connected system, if we are to have any chance of finding a solution that makes our problem better.
For hundreds of years, there has been little to challenge traditional hierarchies for their ability to organise at scale. Holacracy is doing just that.
It’s a form of Adhocracy, which we covered in an earlier article. But, whilst we are way past ‘peak adhocracy’, it seems that holacracy is is thriving.
Holacracy is a modern attempt to reform traditional hierarchies. It keeps the aspect of senior level overviews and subordinate focus. But it gives a far greater autonomy to individuals, and a more substantial decision authority to small teams at the focus of operations and change.
The Pareto Principle – also known as the ’80-20 Rule’ – is one of those ideas that crops up in many places. It is ubiquitous because it is an expression of a general principle of nature. It is an example of a power law. Extremely long rivers are rare. Small ones are very common. A small number of words appear frequently within a language, whilst there are very many words that we hardly use at all.
But what makes the Pareto Principle a valuable version of this phenomenon is that it is easy to articulate and understand. And it is therefore easy for managers to apply, to get better results. Consequently, since Joseph Juran rediscovered and named the idea in the 1930s, it has become an indispensable snippet of knowledge, for anyone in management.
The thing about cognitive biases is their pervasiveness. They can affect all areas of our thinking. But some have a bigger impact on management, leadership, and business decisions. And one example is the Halo Effect.
The halo effect can take a single example of excellence, and create the impression that we have a star in our midst. This could be company results, an effective middle manager, or a new hire.
With all of these, we have the ability to see something great and assume it is part of a pattern. The evidence for this may be lacking. Indeed, it may be a one-off hot-spot in a field of mediocrity.
In understanding how we think, one big idea has dominated in recent years. It became widely known through Daniel Kahneman‘s phenomenal best-seller, ‘Thinking, fast and slow’. It’s the idea that we process information in two ways. There are two parallel thinking systems in our minds: System 1 and System 2.
There are many terms for these two systems. They have been called:
associative and rule-based
implicit and explicit
intuitive and analytical
experiential and rational
and many more
The terms System 1 and System 2 are marvellously neutral. They first emerged in a paper by Keith Stanovich and Richard West. But it’s Kahneman’s adoption of this language and the popularity of his book that gave them fame.
Arguably, behavioural economics is Richard Thaler’s baby. And an important baby it is too, being part of an essential late twentieth century trend. At last, economists – spurred on by psychologists and social scientists, stopped seeing people as ‘rational units of intelligent decision making’ and started seeing us as part rational and part irrational bundles of ideas, knowledge, feelings, desires and biases.
It is with these filters, rather than pure rationality, that we make decisions. And that insight was an essential correction to classical economics. It won the psychologist, Daniel Kahneman, a Nobel Prize in economics. His collaborator and mentee, economist Richard Thaler, then led the development of the ideas.
Writing with University of Chicago colleague, Cass Sunstein, they together produced the massive selling book, Nudge. But why is co-authorship enough to justify Sunstein’s place in a management thinker pair, when Thaler led the charge on behavioural economics? The answer lies in Sunstein’s contribution: he’s a constitutional and administrative lawyer with a strong interest in social policy. His thinking helped bring behavioural insights out of the classroom, ad agency, and boardroom, and into public policy.
It’s not just in the supermarket that we get nudged to buy stuff, but when we interact with Government too. And between them, Thaler and Sunstein’s conception of liberal paternalism inspired a number of benign behaviour changes, with no whiff of compulsion. Their ideas were picked up by governments all over the world, including the US, where Sunstein (a former colleague) served in Barack Obama’s administration, and here in the UK, where Prime Minister David Cameron established a Nudge Unit within Government.
Richard Thaler was born in 1945 in New Jersey. He studied at Case Western Reserve University, gaining his BA in 1967. From there, he went to the University of Rochester, for his MA (1970) and PhD (1974).
In his PhD, Thaler started the work that still occupies him today, investigating the economic value of a life. What he found was a huge disparity in people’s evaluation of the worth of one week of their life. When asked to put a value on a week lost, or on a week gained, people needed a high payment to be prepared to give up a week of life. Yet they would be prepared to pay far less to gain an extra week.
This imbalance is, of course, irrational. And that interested psychologists Daniel Kahneman and Amos Tversky. They researched all sorts of biases and shortcuts in our thinking. Thaler became a long term collaborator with the pair.
Thaler stayed in the academic world, holding teaching and research positions at many institutions. His permanent academic homes were the Universities of Rochester (1974-8), Cornell (1978-95) and then Chicago, from 1995 to the present day. It was at Chicago that Thaler met Cass Sunstein.
Cass Sunstein was born in Massachusetts, in 1954. He gained his BA at Harvard College in 1975 and his JD from Harvard law School in 1978. Before returning to academia, Sunstein clerked for justices in the Massachusetts and US Supreme Courts, and served in the Justice department from 1980-1981.
In 1981, he became an Assistant Professor at the University of Chicago, becoming a full Professor in 1985. He remained at Chicago until 2008, when he formally moved to a post at Harvard Law School. However, having become friends with another Chicago Law School professor, Barack Obama, he headed up the Whitehouse Office of Information and Regulatory Affairs from 2009 to 2012.
In 2008, after working together on the ideas in the book for five years, and having known each other for ten, Thaler and Sunstein published a best-selling book, Nudge: Improving Decisions About Health, Wealth and Happiness. This brought the ideas of behavioural economics to a wide audience, and introduced many of us to the term ‘choice architecture’.
Choice architecture is a beautifully simple idea. By framing choices in a certain way, we can make it easier – physically, cognitively, psychologically – for people to make one choice rather than another. It’s how supermarkets channel customers and how governments secure compliance.
Choice architects study the heuristics people use to make decisions. These are the mental shortcuts we apply, that save us from having to think too carefully, expend too much effort, and take time over mundane choices. Except these heuristics effectively hard-wire biases into the way we make decisions. These are the biases that choice architects can exploit.
A ‘Nudge’ is simply a selection of how to frame (or architect) a choice, so that people can more easily make a choice that will satisfy them. Setting up nudges that satisfy you, at the cost of the chooser is manipulation. If you can avoid forcing your outcomes upon anyone, but make it easy for them to make a choice that suits them, Thaler and Sunstein refer to this as ‘libertarian paternalism’.
The tools that choice architects use are:
Setting the right defaults, so the easy choice is the best one
Anticipating errors, and therefore making correct behaviour easier
Setting up complex choices to highlight the right ones
Creating positive incentives for beneficial behaviour
The Behavioural Economics Context
Choice architecture is a subset of behavioural economics. This is the study of how real humans (not the artificial idealised, wholly-rational ‘econs’ of earlier economic theory) behave. Given economic choices, we are not wholly rational. This distorts markets and creates dynamics that do not conform to rational economic theory. This may seem like an obvious observation, but to economists through most of the twentieth century, it was not obvious at all. Year after year, new models and theories worn prestigious prizes. All were based on the myth of the ‘rational actor’.
Now, we know for sure that this rational actor is an ideal at best and a mythical creature at worst, we can start to do messier, but more realistic economics. That’s behavioural economics or, as Richard Thaler points out, Behavioral Economics: ‘why do the British need a superfluous u?‘, he asks. Because we are not rational, I suppose.
Richard Thaler on Nudge
A lot of great content, though edited with some disconcerting cuts.
Chip and Dan Heath have a writing style that turns important ideas into simple formulations, and illustrates them with compelling case studies. Their three books (to date) are all best-sellers and each is well-worth reading for any manager, professional, or entrepreneur.
Of the three, the first is not only the one that made their name, but the one that, for me, has the stickiest ideas: Made to Stick.
Chip Heath is a graduate of Texas A&M University where he studied Industrial Engineering. He went on to do a PhD in psychology at Stanford University. He is there today, as Professor of Organisational Behaviour at the Graduate School of Business, having also held academic posts at The University of Chicago Graduate School of Business (1991 to 97) and the Fuqua School of Business at Duke University (1997-2000).
Dan Heath has a BA from the University of Texas at Austin and an MBA from Harvard Business School. He has been a researcher for the Harvard Business School and also co-founded an innovative academic publisher, Thinkwell, whch provides school level textbooks. He now works at Duke University, as a Senior Fellow at The Center for the Advancement of Social Entrepreneurship (CASE), where he also founded the Change Academy.
The Heath Brothers’ Books
Chip and Dan Heath have written three books together:
Made to Stick: Why Some Ideas Survive and Others Die (2007)
Each of them describes a series of steps for being effective in doing something – communicating ideas, making change, and taking decisions. I strongly recommend you to read these books – I have gained a lot from each of them. Here, all I’ll do is summarise the main content.
Made to Stick
Why is it that some ideas circulate easily? People like to share them and, when they do, the ideas are memorable, compelling and soon become pervasive. They seem to be almost made to stick.
If we can understand the answer, perhaps we can also make our own ideas sticky. This is the substance of the Heath’s ideas, which they present in a handy acronym: SUCCESs.
Simple: We need to simplify our ideas by whittling away every superfluous detail to find their core, which we can then communicate to others.
Unexpected: One way to get attention is with surprise, and then we can hold that attention by stimulating curiosity.
Concrete: Real stories and examples make our ideas solid. Abstract theory is the enemy of engagement with your ideas.
Credible: People need to believe your idea for it to stick, which means giving them examples they can relate to, demonstrating your authority, and providing ways they can access proof for themselves.
Emotional: We make choices and remember ideas, when they trigger powerful emotions, so you need to demonstrate what’s in it for your audience, in terms of self-interest and emotional payback.
Stories: We are story-telling creatures, and we use stories to guide us in how to respond to situations. They make things real and inspire us.
One of the key roles for managers is to make changes in our organisations. But it is fiendishly difficult. The Heaths argue that the reason is a conflict that’s built into our brains, between our rational mind and our emotional mind. This idea will be familiar to readers of Daniel Kahneman’s Thinking: Fast and Slow.
The Heaths use the metaphor of an elephant and its rider. The elephant is the powerful emotional aspect of our brain, which can easily take us where it’s going anyway, while the rider is our rational side that needs to motivate the elephant to go in the right direction. They offer a three way prescription to:
Direct the rider
Motivate the elephant
Shape the path
Direct the Rider
Here, we have to find out what works and repeat it, discover specific steps that will get people where you need them to go, and create a direction to go and a reason to go there.
Motivate the Elephant
We don’t do things because we know they are right, we do them because they feel right. So we need to appeal to people’s emotions as well as their reason. We also need to make change easy, by presenting small, simple steps. Finally, they advocate instilling a growth mindset.
Shape the Path
Change people’s environment to shift behaviours and make the changes feel easier. Then turn the new behaviours into habits, by making repetition easy. Finally, use successes to spread the ideas and engage others.
Back to Kahneman! Our decisions are disrupted by an array of biases and irrationalities. We jump to conclusions and then become overconfident that we’re right. We look for confirming evidence and disregard other information that conflicts with our prejudices. We’re distracted by emotions – which make emotionally resonant ideas sticky.
In short, we’re rubbish at making good decisions!
And knowing it doesn’t help, ‘any more than knowing that we are nearsighted helps us to see’, say the Heaths. But luckily they also give us a four-step framework to help us make better decisions: WRAP.
Widen Your Options
Yes or no, this or that, big or small. Narrow choices make bad decisions, so the first step is to explore a wider space of options. And the book shows you how.
Reality-test Your Assumptions
Stop trying to show you’re right and start trying to prove you’re wrong. Only if you fail, then you can start to be confident in your assumptions.
Attain Distance Before Deciding
Shift your perspective in time, place or emotion. How will this decision look in five years, what do people do somewhere different, what would you tell your friend to do?
Prepare to be Wrong
Overconfidence hides the flaws in your thinking, so look for the things that can go wrong and find ways to alert yourself when events mean you need to shift decision.
What? You want more of a summary than summarising three chunky books in a thousand words. Just go out and read them!
By the way, there are lots of great resources linked to their books, on the Heath Brothers website.