“The idea that future is unpredictable is undermined everyday by the ease with which past is explained”
Danial Kahneman
When I first heard about Covid-19 around Janurary, 2020, the new virus, Wuhan city lockdown, etc, naturally, my mind started searching for some answers. Was wondering what is going to happen, what will be the impact on my stocks, business? So I went to usual news sites, read many expert comments, etc.
All this because I was seeking some quick answer.
What I noticed among news sites, or expert comments was most were referring the COVID-19 event to recent past events such as SARS, Ebola, etc to arrive at some conclusion. This was mainly to come to a quick conclusion!
For a while, I kind of concluded that this virus might remain in China and may have a little impact like SARS but and won’t affect us!
This is the way as I see many of the so-called experts, most governments responded. When the future is unpredictable our nature is to look for some past reference, familiarity to come to quick conclusions.
We don’t want to be in an unpredictable state for a long time. Our brains are seeking fast response!
This nature of ours has huge implications on the way the decision are made! As I see, if running a business, leading a team, or for an investor, it is very common to encounter situations where the future is unpredictable.
You might be facing a complex new problem with limited information, having time constraints, and the way our brain tends to operate is by finding fast emotional decision making against the slow logical way of decision making.
Though we like to go the logical way our brains are hardwired to use emotions response. The subject of the mental model of decision making is to train our brain to overcome this natural response system!
In this blog, I talked about the framework for decision making. What is important also to understand the brain science behind decision making and mental models that helps to overcome barriers to good decision making.
Ray Dalio the famous investor lists 2 biggest mental barriers to logical way of decision making,
The two biggest barriers to good decision making are your ego and your blind spots. Together, they make it difficult for you to objectively see what is true about you and your circumstances and to make the best possible decisions by getting the most out of others.
If you can understand how the machine that is the human brain works, you can understand why these barriers exist and how to adjust your behavior to make yourself happier, more effective, and better at interacting with others.
Ray Dalio, Author, Bridgewater Assosciates
The key point mentioned is knowing how the brain works and then adjusting our behavior to make effective and logical decisions which demand logical analysis.
This is not the way usually people have understood decision making, but with recent discoveries on brain science, it is possible to understand decision making from the context of brain science.
Does one naturally tend to come up with rational, logical decisions arrived following a proven process or one tends to be irrational, emotional, and resorts to quick and dirty way driven by ego & blind spots?
Try the experiment
To understand this, consider the following three questions below and answer without reading further:
- A bat and a ball together cost Rs110 in total. The bat costs a 100Rs more than the ball. How much does the ball cost?
- If it takes five minutes for five machines to make five widgets, how long would it take 100 machines to make 100 widgets?
- In a lake, there is a patch of lily pads. Every day the patch doubles in size. If it takes 48 days for the patch to cover the entire lake, how long will it take to cover half the lake?
Now each of these questions has an obvious, but unfortunately incorrect answer, and a less obvious but nonetheless correct answer.
In question #1 if your answer was Rs.10, then the quick and dirty system triggered early. However, a little logic shows that the correct answer is actually Rs. 5 (A simple formula of (x + 100+ x = 110), gives x as 5 which is cost of ball)
In question #2 if answered 100, then you relied on the gut reaction. However, with a little reflection we can see that if it takes five machines five minutes to produce five widgets, the output is actually one widget per machine per five minutes. As such, it would take 100 machines five minutes to make 100 widgets.
Finally, in question three, the most common incorrect answer is to halve the 48 days and say 24 days. However, if the patch doubles in size each day, the day before it covers the entire lake, it must have covered half the lake, so the correct answer is 47 days.
Don’t worry if you got one or all three of those questions wrong—you aren’t alone. The test was performed on 3,500 people and it was found that only 17 percent managed to get all three questions right. Thirty-three percent got none right!
The best performing group were MIT students; 48 percent of them managed to get all three questions correct.
What is this got to do with decision making? These tests show how the untrained brain works. The untrained brain relies on the obvious and quick answer.
It is to do with the emotional part of the brain that relies on a quick response.
The logical part that wants slowly to respond takes a backseat.
Daniel Kahneman is the author of Thinking, Fast and Slow, the seminal book on how we think says,
This is also called System 1 (Fast Thinking) based on first impressions, gut feelings and intuitions and System II(Slow Thinking), critical thinking system, working through situations before making choices.
Daniel Kahneman
The book is indeed difficult to read and covers a lot more subject on how we think and make choices, but the one point which I want to summarise below is why the emotions drive our decisions where logic should triumph and how to avoid the same.
Fast and slow thinking and decision making
Most people think decisions are made logically by taking step by step approach. Reality the decisions are driven by emotions. Fast-thinking (System1) is actually the default option, so all information goes first to the System1 for processing.
That is because the emotional part is automatic and effortless. The judgments made by the emotions are generally based on aspects such as similarity, familiarity, and proximity (in time).
These mental shortcuts allow the System1 to deal with large amounts of information simultaneously. Our brain’s natural response is conserving energy and it is always looking for ways to do this and decisions with System1 (Fast thinking) serve that.
Effectively, relying on emotions for decisions is a quick and dirty ‘satisfying’ system, which tries to give answers that are approximately (rather than precisely) correct.
To satisfy our emotional part, something as simple as valid or little authority is enough! That is why our media keep calling the experts, so people just listen and accept and don’t think!!
The logical way of decision making, that is Slow thinking (System11) is done by processing information. This way requires a deliberate effort, to follow a deductive, step by step approach to problem-solving. This consumes a lot more energy especially if you are doing for the first time!
Also logical way, you can only handle one step at a time (like any logical process), so it is a naturally slow and serial way of dealing with information.
The logical brain access evidence and logic to make the System1 believe that something is true against some authority or expert advice!.
When to not rely on emotions for decision making?
Though we like to be logical, the reality is that the emotions generally take over as it can handle a lot more action. The emotional side can process tons of information (by processing images, patterns) quickly and come with a quick and dirty answer!
And that is why we end up trusting the initial emotional reaction because it is fast and comes to conclusion quickly over the logical system.
What the studies of neuroscientists have found is the parts of the brain associated with the emotions is older, evolutionarily speaking, than the parts of the brain associated with the logic | thinking part.
It means the need for emotion has evolved the need for logic. In the jungles for our forefathers, the emotions and quick reaction to fight or flight kept him safe than logic.
But the problem with emotional responses, it cannot differentiate b/w real and imaginary.
For example, if you spot a rope in the dark, it is very much possible the instant reaction is of fight or flight because you might feel it is a snake. Now later you realize it is just a rope, but still, the response was to quickly move away.
Because when it comes to a survival point of view, a false positive is a better response than a false negative. Emotion is designed to trump logic.
This emotion designed to trump logic has consequences many times in our civilized world. The threats we perceive are not about survival, but our emotional part of the brain cannot differentiate, and triggering fight or flight response than allowing the logic to take over.
This is not a good thing. To overcome the auto-trigger of emotional response for every panic perceived, the brains need to be trained.
When do people tend to respond with emotions where they should be responding with logic?
Psychologies have explored this question and have come up with the following conditions which increase the likelihood of using emotional|irrational side than logical|rational side of thinking:
• When the problem is ill-structured and complex.
• When information is incomplete, ambiguous, and changing.
• When the goals are ill-defined, shifting, or competing.
• When the stress is high because either time constraints and/or high stakes are involved.
• When decisions rely upon interaction with others.
Now when it comes to decisions such as investments, management strategies, tactics, pretty much every decision of any consequence is usually falls into at least one or more of the above categories.
Letting emotions drive the decisions is not the best way.
That is why the world ’s greatest investor, Warren Buffett, has said that,
“Success in investing doesn’t correlate with IQ once you’re above the level of 100. Once you have ordinary intelligence, what you need is the temperament to control the urges that get other people into trouble in investing.”
Warren Buffet
Conclusion
The mental model of decision making is to overcome the automatic trigger of emotional (System1) response where Logic (SystemII) response is required.
This is not easy but top performers in every field have understood and hence training the brains by following techniques such as,
- Using Checklists and having a process for decision making
- Being prepared early for potential risky outcomes and having a clear response ready
- Practicing a higher level of awareness following practices of meditation
- Minimizing the number of decisions
Hope you liked the article and do share or write comments, either way.
