Analyzing the Dynamics of Decision-Making
If Thinking, Fast and Slow is anything like the review I just read in Sunday’s Washington Post, author Daniel Kahneman should be a marketing rock star and anyone depending on people’s decision-making should read this book. Reviewer Christopher Shea writes that Kahneman “wants to help us mend our fuzzy thinking and change the way we talk about decision-making; he takes very seriously the language we use to Monday-morning quarterback ourselves: ‘There is a direct link from more precise gossip at the water-cooler to better decisions,’ he writes.”
Basically, why do we make the decisions we make when so many of them soar in the face of rational thinking? Kahneman shared a Nobel Prize in economics for his work on decision theory. With his longtime collaborator, Amos Tversky (who died in 1996), he developed prospect theory—“we deliberately chose a meaningless name for [this],” Kahneman said. “We reasoned that if the theory ever became well known, having a distinctive label would be an advantage. This was probably wise.” In prospect theory, we fear possible losses more than we value possible gains. Shea writes: “Would you take a bet on a one-time coin flip that paid $200 if you won but cost you $150 if you lost? Most people wouldn’t, though it’s tilted in your favor. Pro golfers tend to make a higher proportion of their putts when they’re trying to avoid a bogey (which would result in losing a stroke) than when they have a chance for a birdie (for the possible gain of a stroke); here, too, avoiding a failure is more crucial than achieving a triumph.”
I would have thought the opposite—that the lack of pressure on the birdie putt would improve your chances. But the more you think about it, the power of the “fear of possible losses” makes sense. Do I really want to attend that concert that has no more tickets left, or do I just feel like I’m missing out? Do I really want to eat at that restaurant with the line out the door, or again, am I just upset at not being able to eat there?
Look at this academic study that Kahneman cites in the book about Campbell’s Soup: “When shoppers saw a sign reading ‘Limit of 12 Per Person,’ they bought an average of seven cans, twice as many as they bought when there was no sign. Twelve was the anchor. Kahneman believes anchors could affect public policy. For instance, if punitive damages were capped at, say, $1 million, that figure would exert a gravitational force on jurors, perversely causing them to award sums near that figure when they’d otherwise dispense smaller ones.”
This is the stuff that marketing dreams are made on. When an opposing negotiator makes an unfair opening gambit, Kahneman recommends making a scene. Because you are trying to erase that giant thud that just landed on you. And when it comes to risk and reward, he wants you to make decisions “on the assumption you’ll face many such bets in your life. (Professional traders always take the $150/$200 bet.)” And how about this sentence: “Humans make choices that go against self-interest too often for freedom to be the highest good.”
Kahneman also asserts that the mind creates stories out of material that may not be true. Shea mentions a study Kahneman did of the records of an investment firm over 25 years. There was no link between managers doing really well on their investments one year and repeating that success the next. Yet, that’s how pay was awarded.
Sadly, Kahneman, who is 77, remains skeptical about our capacity to change how we make decisions—himself included. “I have made much more progress in recognizing the errors of others than my own,” he writes. I feel better already.
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