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Cognitive Bias – Getting it Wrong

Cognitive Bias

Cognitive BiasYour 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.

Continue reading Cognitive Bias – Getting it Wrong

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Daniel Kahneman: Judgement and Bias

Daniel Kahneman has won many awards and honours, but none more surprising, perhaps, than a Nobel Prize. Why is this surprising? Kahneman is, after all, one the most eminent and influential psychologists of his time. It is surprising because there is no Nobel Prize for psychology: Kahneman was co-recipient of the 2002 Nobel Prize in Economics ‘for having integrated insights from psychological research into economic science, especially concerning human judgement and decision making under uncertainty’.

In short, what Kahneman taught us was that, before he and his co-worker, Amos Tversky (who sadly died six years before the Nobel Committee considered this prize and so was not eligible), had started to study human decision making, all economic theories were based on the same, false assumption. Kahneman and Tversky taught us that human beings are not rational agents when we make economic decisions: we are instinctive, intuitive, biased decision makers.

And, if that sounds pretty obvious to us now, then we have Kahneman and Tversky, and their long walks together, to thank.

Daniel Kahneman

 

Short Biography

Daniel Kahneman was born in 1934 to Lithuanian emigré parents living in Paris (although he was born when they were visiting family members in Tel Aviv). When Nazi Germany occupied France, the family went on the run, ending up after the war in what was then (1948) Palestine under the British Mandate, shortly before the formation of the State of Israel.

In 1954 he gained his BSc from the Hebrew University, in Psychology and Maths, and joined the psychology department of the Israeli Defence Forces, helping with officer selection. Four years later, he went to the University of California, Berkeley, where he was awarded a PhD in 1961. He returned to the Hebrew University in 1961.

It was in 1968, while hosting a seminar, that he met Amos Tversky. They started collaborating shortly afterwards. Their fertile discussions often involved thought experiments about how we make decisions and judgements, uncovering in themselves a series of heuristics – or thinking shortcuts – which they went on to observe in controlled laboratory experiments. Their collaboration continued until Tversky’s death in 1996.

In that time, they collaborated with other researchers, most notably, Paul Slovic and economists Richard Thaler and Jack Knetsch. Their many insights into how we make judgements and the application to economic decision-making eventually led to the Nobel Committee recognising Kahneman with the 2002 Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel.

Kahneman’s 2011 book, Thinking, Fast and Slow is a summary of a remarkable life’s work. If the ideas are new to you, they may well rock your world. It is not an easy read, but it is remarkably well-written for an intelligent lay audience. Even if Kahneman’s work is familiar to you, this book will repay close reading.

Kahneman’s Ideas

There is far too much in Kahneman’s work to even begin to summarise it, so I want to focus on three biases that he discovered, which have a profound impact on the choices we make; often leading us far astray.

The Anchoring Bias

The first information we get biases any subsequent choices we make. Your father was right, or your mother or anyone else who told you at a young age that first impressions count. Systematically, the human brain takes the first information it receives, and creates an interpretation of everything else that is anchored in the inferences it draws from that first impression. In management terms, this accounts for the horns and halo effect, that biases us to seek and spot confirming evidence for our pre-existing assessment.

The Representativeness Bias

Who is a more likely person to find working in a car repair shop, changing your brakes? Is it A: a young woman with blond hair and pink eyeliner, or B: a young woman with blond hair and pink eyeliner, whose father owns the car repair shop?

If you think B, you have fallen for representativeness bias. The story makes more sense in our experience, doesn’t it? A young woman with blond hair and pink eyeliner is not a person you’d expect to see in that environment. But a young woman with blond hair and pink eyeliner, whose father owns the car repair shop, may feel right at home. But statistically, this is rubbish. For every young woman with blond hair and pink eyeliner, only a small proportion will also have fathers who own a car repair shop.

The Availability Bias

Recent events bias our perception of risk. They are more available to recall and hence have a stronger impact on our intuition than do counter examples. The classic example is perceptions of risk of train travel, after a train crash. Trains are safe: they rarely crash. Cars crash a lot: there are many accidents every day. But they are rarely reported, so we have no immediate intuitive sense of the statistics.

The Impact of Kahneman’s Work

Kahneman’s work has had a huge impact. Decision theory existed before he came along, but he and Tversky revolutionised it. But it was Kahneman, along with Tversky, Knetsch and Thaler who pretty much invented the discipline of behavioural economics – and perhaps the relationship that drove that development was the friendship between Thaler and Kahneman.

Now Behavioural Economics infuses much of public policy and social influence that corporations try to exert over us. Thaler’s book, Nudge (with Cass Sunstein) is a best seller and Thaler and Sunstein both advise Prime Ministers and Presidents. Next time you get a document from Government, or go into a store, and you find yourself complying with their wishes without thinking, there is a chance that you have been ‘nudged’. And the roots of these ‘choice architectures’? The roots are in understanding our heuristics and biases. And that was Kahneman’s contribution.

Kahneman at TED

Here is Daniel Kahneman, talking about how we perceive happiness and discomfort.

[ted id=779]

 

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Decision Making

The Management Pocketbooks Pocket Correspondence Course

This is part of an extended management course. You can dip into it, or follow the course from the start. If you do that, you may want a course notebook, for the exercises and any notes you want to make.


In understanding decision-making, there are three key things to focus on:

  1. Using a structured process
  2. The role of intuition, gut instinct and hunches
  3. The effects of bias and automatic thinking

Let’s look at each of these in turn.

Structured Decision Making Process

… like the example below.

Structured Decision Process

One of the most important choices in your decision process will be whether to go for an adversarial process of setting the options against one another – perhaps even having advocates for each, competing with one another to win the decision – or to go for a process of inquiry, learning as much as you can before assessing the options.

Intuition

Although Malcolm Gladwell received a lot of attention for his book Blink, his work leans heavily on the research by Gary Klein and his books, The Power of Intuition and the more technical Sources of Power are first rate.  Klein shows how, in domains that are very complex and in which you have extensive experience, your intuition can quickly get you to the right understanding, well ahead of your ability to explain why or how you reached the conclusion you did.  But, if you don’t have sufficient experience, then your hunches are likely to be wrong, due to the existence of…

Bias and Automatic Thinking

Two psychologists, Daniel Kahnemann and Amos Tversky, were responsible for overthrowing the crude assumption that economics is based on rational decisions.  In fact, they showed that many decisions are a result of automatic thinking and biases.  The automatic thinking is a short cut that works well in the domains in which humans evolved, but leads frequently to wrong answers in a modern world context.  An example is the ‘horns and halo effect’ and another is our bias towards noticing examples that confirm what we believe to be true, whilst being blind to counter examples.  Daniel Kahnemann wrote the wonderful ‘Thinking, Fast and Slow’ to summarise a life’s research and it is, without a doubt, one of the most important and stimulating reads of the last few years.

Further Reading

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Three ways to get it wrong

imageIn last week’s post we discussed some of the decision-making traps that board members–or, indeed, any decision-making group–can fall into.

At the heart of our understanding of these biases is the work of Daniel Kahneman.  He was awarded the Nobel Prize for Economics for his work in this area, with co-worker Amos Tversky. in 2002.  Sadly Tversky died in 1996 and was ineligible for the prize, under Nobel rules.

Behavioural Economics

Daniel KahnemanKahneman is perhaps the leading psychologist in the field of behavioural economics – very much a field du jour.  His research was carried out with many collaborators including Paul Slovic, an expert in the field of perception of risk, and Richard Thaler, most notable for his use of the term “nudge” to describe how we can use perceptions to shift behaviour.

The classic paper that Kahneman and Tversky wrote was ‘Judgment under Uncertainty: Heuristics and Biases’, published in the Journal Science in September 1974.

Heuristic: A rule of thumb or simple procedure for reaching a decision or solving a problem.

In this article, they introduced three important heuristics, which guide many of our decisions – and frequently let us down.

Representativeness

We tend to believe a possible event is more likely when we can recognise it as a part of a familiar pattern.  It is as if we like to create stories about our world that follow standard arcs or plots (see for example Christopher Booker’s wonderfully argued The Seven Basic Plots: Why We Tell Stories.  If a potential event slips easily into one of these plots, we rate it as more likely than if the plot seems to need adjusting.

Availability

Recent salient examples render a possible event more likely in our minds than other events that do not trigger such easy recall.  Immediately after a rail accident, people fear rail travel more than normal and take to their cars.  The resulting spike in road deaths usually exceeds the immediate effects of the road accident.

Anchoring

We make estimates and decisions from a starting point and the point we choose can bias our estimate or decision.  Surprisingly, even an unrelated figure presented randomly can skew a later numerical estimate.

Kahneman won’t stand still

In 2007, Kahneman received the American Psychological Association’s Award for Outstanding Lifetime Contributions to Psychology and this year, he was included in Bloomberg 50 most influential people in global finance.  He says that all he knows about economics, he learned from co-workers like Richard Thaler.  He is a much sought-after speaker and commentator in the business arena, and you can find recent work documented on TED (see below), in an extended interview, and in two excellent articles on the websites of prominent global strategy consulting firms,McKinsey and Booz & Company:

Daniel Kahneman: The riddle of experience vs. memory

Using examples from vacations to colonoscopies, Kahneman reveals how our “experiencing selves” and our “remembering selves” perceive happiness, and why experience does not influence decisions, in this 2010 TED talk.

[youtube=http://www.youtube.com/watch?v=XgRlrBl-7Yg]
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