Wednesday, 9 April 2014
Know more about your decisions
Nobel Laureate David Kahneman is an interesting guy. He won the 2002 Nobel Memorial Prize in Economic Sciences. This achievement was based on his work in the area of Judgment under Uncertainty: Heuristics and Biases, published in 1974. Amos Tversky co-authored the paper but unfortunately had passed by time the Nobel prize was awarded.
The 1974 paper is worthy of a discussion in its own right but Kahnemans influence does not depend on that seminal work, he has constantly developed and built upon both his and other studies in the area of Decision Making.
His recent book Thinking Fast and Slow looks at several studies which explain how we are often deceived or mistaken in our thinking. It shows how our decisions are affected by silent influences such as previous experience, how questions are phrased, how we estimate/interpret results. Complex statistical ideas like ‘Regression to the Mean’ are explained in accessible terms that a layman would both recognise and understand.
Having read several interviews, books and papers by Kahneman over the years, out of all of his ideas and theories, one in particular has always resonated – Keep a Decision Journal.
If you are making a decision of consequence, take a moment to think. Write down the relevant variables that will decide the outcome, what you expect to happen, and why you expect it to happen. If a few of these are unknowns, that is ok, just note them as such and state why you have made assumptions in the absence of all the facts. Most times you won’t have all the facts or variables defined.
This seems basic enough - write down how you came to a decision and what you know about what you decided. If you can’t write down what was discussed, the relevant variables that give rise to the decision and why you believe something will turn out the way you expect it to, then maybe you should not be making a decision in the first place.
The act of writing out a decision and its variables will counter some of the biases we all have. These include overly relying on information that is easily available, or being anchored by a previous estimate or being unduly influenced by hindsight bias.
If you review your decisions you will see a trend in the number or types of unknown variables, poor assumptions, poor outcomes etc. You can then address and measure improvement in these areas for future decisions. At its most basic level, you will see which decisions were not thought through and what assumptions were relied upon.
The best part is, to implement this Nobel Prize backed management technique only costs the price of a student copy book and a pen. Now that’s good economics.