Menu

CEB Blogs

Topics

Corporate HR

Daniel Kahneman on How to Make Better Decisions

One of the world's leading thinkers on decision making explains why employees make bad decisions and how companies can improve them

Every day, people make countless decisions in an company, everyone from a new hire to the CEO. Once, not so long ago, a decision made by the CEO or a senior executive on their team then determined many of the decisions that everyone else made but in today’s work environment this happens far less frequently.

The need for employees to now collaborate with colleagues in various parts of the company and at all levels of the hierarchy to accomplish almost anything, the far greater complexity of reporting lines, and the unpredictability of markets and the speed at which changes happen – new products bought to market, shifts in demand, changes to the supply chain, and so on – often require a response before there’s time to run it up the chain of command for executive assent.

All of which has meant it is unrealistic for any senior management team to try to constrain decision making to those at the top of the organization.

Inclusive Decision Making

But this isn’t always a bad thing. Not only will people closer to the detail of a decision be the one taking it, involving more employees in decision making for a big change initiative – such as a piece of M&A or responding to a fundamental shift in customer demand – increases the probability of the success of that project by as much as 24 percentage points.

More inclusive decision making isn’t easy, however. Companies need their employees to make accurate decisions, and these can often be muddied by natural human biases.

Daniel Kahneman, winner of the Nobel Prize in Economic Sciences and senior scholar at the Woodrow Wilson School of Public and International Affairs, is one of the world’s foremost experts on the topic. He says, “Every organization, every business, is a factory for making decisions. They make multiple decisions at the same time. Yet we tend to be much more rational and much better organized when we design factories than when we design decision-making procedures.” By acknowledging these biases, companies can begin to approach projects and ideas rationally while both empowering their employees and achieving business results.

How We Make Decisions – Fast and Slow

Kahneman explains that contrary to conventional belief, people rarely make decisions based on the rational agent model. In the rational agent model, decision makers determine their course of action based on a decision’s likely consequences.

Typically, however, people think in terms of gains and losses. He describes this as a “big departure from the rational agent model because if you think in terms of gains and losses, you are going to make inconsistent decisions.” These inconsistent decisions stem from loss aversion, or the idea that a loss will affect someone more than a gain will. The desire to avoid a loss may cause an individual to make a decision based on what he or she will lose rather than an ideal final state. This line of reasoning is where inconsistent decision making arises.

People usually make decisions in one of two ways, according to Kahneman. The first system is automatic, frequent, emotional, and subconscious. This method is similar to intuition — instead of taking an active role in a decision, one tends to be more passive, carrying out an action because it feels like the right or natural thing to do.

The second system, on the other hand, is slow, effortful, infrequent, logical, and calculating. In this type of system, one takes time to reflect on a decision, looking at all the effects of an outcome. To maintain consistency in decision making, organizations would ideally follow system two. The prevalence of system one, however, proves hard to eradicate.

System one is popular partly because it is easy. People operating in system one will often bend evidence they are presented with to fit an existing story. Kahneman describes this phenomenon as cognitive illusion. Cognitive illusion is powerful because “you know that what you see is wrong, but you can’t help yourself,” Kahneman explains. In a cognitive illusion, “we generate stories that explain our belief, and then we have the impression that our beliefs are explained by those reasons. But that is an illusion.”

Cognitive illusion lends itself to availability bias, as well. Availability bias, Kahneman elaborates, is “anything that comes to mind easily [that] has an advantage in our thinking and is likely to influence us.” Ideas, thoughts, and experiences that are top of mind and that seem to make sense will likely occur again. This type of associative thinking dominates the mind, which functions primarily by this type of association.

Overcoming Biases in Decision Making

It’s not easy for anyone to overcome these biases individually. People use intuition and other shortcuts daily with simple acts, such as driving home from work while maintaining a conversation. But when it comes to organizations as a whole, however, Kahneman is more optimistic. Although individuals’ ability to control biases by “recognizing situations where you’re likely to make an error… and slow[ing] yourself down [to] try to compute the answer in a different way” can be difficult, organizations can implement procedures and norms to combat some of these tendencies.

Organizations and individuals tend to “short-circuit the process of decision making to reach an intuition and to reach a feeling that you have solved the problem prematurely,” according to Kahneman. We can still achieve this feeling and make more logical decisions, Kahneman argues, by delaying intuition.

Delaying intuition requires evaluating a decision in multiple stages. “What’s important in reaching accurate decision making is making your judgments independently of each other so that you will not have the effect of the first thing that you heard biasing your interpretation of all the rest,” he says.

How Teams Can Help – Embrace the Crazy

Organizations can also use team exercises to help. For example, Kahneman advises having a session where a team can “embrace the crazy.” This “pre-mortem”— an invention of experimental psychologist Gary Klein — involves assuming that a team’s idea has failed, in effect “embracing the crazy” circumstances that could make a project go awry. Together, the team discusses the presumed history of the failure and all the possible ways the idea could have collapsed. This exercise illuminates “a lot of objections that they hadn’t seen earlier” and allows the team to dissect the idea more critically, Kahneman says.

Teams are also beneficial when a risky decision needs to be made. Individuals making a risky decision will tend to be risk averse. This tendency makes sense for the individual; if he or she makes a wrong decision, he or she is the only one to blame. If a team makes a risky decision, however, the blame will be dispersed among the entire unit. Using a team to make important decisions will naturally fight these individual risk-averse biases.

 

Image sourced from the Social Psychology Network.

 

More On…

Leave a Reply

*

 

Recommended For You

Corporate HR: Don’t Assume Your ‘Best’ Employees are Always High Performers

Performance management systems tend to make managers generalize employees, and so not understand how to...

Close