Decisions, Decisions….

One of the most fundamental tasks we face, personally and professionally, is making a decision. Often, to make our decisions, we attempt to forecast future results, picking the path that leads to the “better” outcome. If we possessed a special algorithm, or had a working “magic 8 ball”, we’d always make the right choice. Unfortunately, as mere mortals, our decision making process is sub-optimal.  We are often surprised to find that a decision that looked sensible at the time, led to a disappointing outcome.

Over the last 40 years, the field of decision science has researched how humans are predisposed to make irrational and counterproductive decisions. A prevailing idea from this research is that evolution has hard wired people to have cognitive biases that underly much of this irrational behavior. Let’s look at three of these biases and see how they undermine our ability to be effective decision makers.

Hyperbolic Discounting is a term used by behavioral economists to describe the natural human tendency to significantly favor immediate as opposed to delayed rewards. In more common parlance, this would be described as impulsivity. We are faced with choices of immediate vs. delayed rewards on a daily basis. Should I have that fabulous piece of cake on the desert tray? It’s going to taste fantastic and provide immediate enjoyment. But it’s going to work against my goal of looking fit at the beach next summer.

A large body of research has demonstrated the hyperbolic discounting phenomenon in a lab setting. In a typical study, subjects are given a pair of choices for monetary rewards and are asked to express a preference. For example, many people will express a preference to receive $100 today as opposed to $200 in a year, despite the fact that this is financially irrational. These same people however, would prefer receiving $200 in six years as opposed to $100 in five years. Notice that the time gap between rewards is the same in both examples; one year. That is, if we zoomed ahead five years in time, we’d face the same decision: Receive an immediate $100, or $200 the next year. But as  hyperbolic discounting describes, the effect of delayed rewards diminishes when viewed further into the future.

Hyperbolic discounting is viewed as a major component of dysfunctional behaviors and poor decisions. It is a driver of poor financial planning, addictive behaviors and procrastination. In any situation where there is an immediate pleasure or reward, we often make that choice, despite severe, negative long-term consequences. In the corporate world, we can see the negative impact of hyperbolic discounting at work. It’s an individual, engaging in busy work, getting a sense of immediate gratification, while making no progress against a critical project that’s due next month. It’s a department, announcing a layoff, looking at the immediate drop in expenses, without weighing the longer term damage to service, morale and culture. It’s the company making an acquisition, with an expectation of immediate growth, without considering the longer term complications of integration.

Another driver of bad decision making is something known as impact bias. Like hyperbolic discounting, impact bias looks at how people forecast the future value of decisions. When people consider a decision, they attempt to predict how this decision will ultimately make them feel. Will buying that new car make me happy? Will I be more satisfied if I switch jobs? Should I break off a dysfunctional relationship? Psychologists have determined that people have a tendency to overweight the expected impact of many decisions. For example, people tend to think that purchases will have a greater positive impact than they actually do.  They also underestimate their personal resiliency, believing that negative events will lead to significant, ongoing suffering.

Researchers have found a number of underlying reasons why people tend to overestimate the future impact of positive and negative events. One prevailing idea looks at the mechanics of how we tend to envision these events. Most people tend to focus on the initial event itself, visualizing the strong emotions that occur immediately. In fact, researchers have a name for this phenomenon, focalism. For example, when considering the new car, people picture the joyful moment of receiving the car at the dealer. They imagine that first ride with friends and family members. When they consider breaking off a relationship, they picture the awful confrontation, fighting and subsequent heartache. In both cases, by focusing on these vivid images, they overestimate the ongoing impact of the situation. In a short period of time, that brand new cherished toy becomes simply the car in your driveway. Negative events, such as failed relationships, also tend to recede to the background. When people focus on the events themselves, they underweight the impact of the vast set of other things going on in their lives.

Another tendency people have when making decisions is to look to the past for guidance. If I’m trying to decide whether to throw a surprise party for a friend, I’ll use past experiences as a point of reference. While this sounds rational, people have a tendency to perform this process in a sub-optimal manner. Specifically, researchers have found that people are likely to recall an atypical, but notable example of the decision.   For example, one is more likely to recall the time that Uncle Jimmy was embarassed by his surprise party, leading to a years long family rift. Alternatively, one might nostalgically recall that amazing surprise party where you met your future spouse. In either case, this single instance is frequently, an outlier, an unrepresenative example, and poor decision guide.

So what can we do to counter our inherent tendencies to use defective strategies that result in ineffective decisions? It all starts with self-awareness. When getting ready to make a significant decision, try to invoke the following strategies:

  • When your decision involves a trade-off between immediate and delayed gratification, visualize the future impact of your decision. Remind yourself that large goals are unachievable, without consistent, small sacrifices.
  • When visualizing the impact of a future decision, discount the immediate emotional reaction that you picture. Remember that the positive glows fade and negative hangovers recede.  Your life satisfaction will be the result of a much greater set of factors than this decision alone.
  • Ensure that you consider a broad range of historical examples. Seek out examples that are beyond your personal set of experiences.
  • Seek out the advice of a trusted friend or professional colleague. Ironically, we have a tendency to be able to advise others better than we can ourselves. When giving advice, cognitive biases don’t seem to impact our decision processes.
  • If you can’t utilize a trusted friend, or don’t feel comfortable sharing the decision you are making, simulate the same process. Pretend you are advising a friend who has brought this decision to you.  What would you tell the friend as a “neutral”, outside party?
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