Harvard Business Review: Researchers have confronted us in recent years with example after example of how we humans get things wrong when it comes to making decisions. We misunderstand probability, we’re myopic, we pay attention to the wrong things, and we just generally mess up. This popular triumph of the “heuristics and biases” literature pioneered by psychologists Daniel Kahneman and Amos Tversky has made us aware of flaws that economics long glossed over, and led to interesting innovations in retirement planning and government policy.
It is not, however, the only lens through which to view decision-making. Psychologist Gerd Gigerenzer has spent his career focusing on the ways in which we get things right, or could at least learn to. In Gigerenzer’s view, using heuristics, rules of thumb, and other shortcuts often leads to better decisions than the models of “rational” decision-making developed by mathematicians and statisticians.
Gerd Gigerenzer: Gut feelings are tools for an uncertain world. They’re not caprice. They are not a sixth sense or God’s voice. They are based on lots of experience, an unconscious form of intelligence.
I’ve worked with large companies and asked decision makers how often they base an important professional decision on that gut feeling. In the companies I’ve worked with, which are large international companies, about 50% of all decisions are at the end a gut decision.
But the same managers would never admit this in public. There’s fear of being made responsible if something goes wrong, so they have developed a few strategies to deal with this fear. One is to find reasons after the fact. A top manager may have a gut feeling, but then he asks an employee to find facts the next two weeks, and thereafter the decision is presented as a fact-based, big-data-based decision. That’s a waste of time, intelligence, and money. The more expensive version is to hire a consulting company, which will provide a 200-page document to justify the gut feeling. And then there is the most expensive version, namely defensive decision making. Here, a manager feels he should go with option A, but if something goes wrong, he can’t explain it, so that’s not good. So he recommends option B, something of a secondary or third-class choice. Defensive decision-making hurts the company and protects the decision maker. In the studies I’ve done with large companies, it happens in about a third to half of all important decisions. You can imagine how much these companies lose.
HBR: But there is a move in business towards using data more intelligently. There’s exploding amounts of it in certain industries, and definitely in the pages of HBR, it’s all about Gee, how do I automate more of these decisions?
GG: That’s a good strategy if you have a business in a very stable world. Big data has a long tradition in astronomy. For thousands of years, people have collected amazing data, and the heavenly bodies up there are fairly stable, relative to our short time of lives. But if you deal with an uncertain world, big data will provide an illusion of certainty. For instance, in Risk Savvy I’ve analyzed the predictions of the top investment banks worldwide on exchange rates. If you look at that, then you know that big data fails. In an uncertain world you need something else. Good intuitions, smart heuristics. [Continue reading…]