ALLISON SPIELMAN ADVISORS

Cognitive Decision Making:

How Your Brain Can Fool You

January 29, 2013

Why Talk About Decision Making?

• It is what we do

• It can help you improve your life

QuizIn middle of page write down the

last 3 digits of your phone number.

Put a mark above or below if you think Attila-the-Hun died before or after the number you wrote.

Now write down the year that you think Attila-the Hun died.

Answer 453AD

Anchoring

• Richard Thaler

• Daniel Kahneman & Amos Tversky

OTHER EXAMPLES

Mahatma Gandhi

Proportion of African countries in the United Nations

IMPLICATIONS

Negotiations

Driving

Relationship

Fund Raising

Framing

Classic Illustration:Rare Asian Disease

IMPLICATIONS

Lawyers influencing juries

Labor negotiations

Medical decision

REPRESENTATIVENESS

Tversky & Kahneman –

The Linda Problem

IMPLICATIONS

Jury decisions

HIV testing

OTHER HEURISTICS

Availability

Recency

Confirmation

Over-confidence

Loss Aversion

200 more by some estimates

POPULAR PRESS

“Sway: The Irresistible Pull of Irrational Behavior” by Brafman & Brafman (2008)

“Blind Spots: Why Smart People Do Dumb Things” by Van Hecke (2007)

“Predictably Irrational: The Hidden Forces That Shape Our Decisions” by Ariely (2008)

“Decision Traps: The Ten Barriers to Brilliant Decision Making” by Russo & Schoemaker

“Everyday Irrationality: How Pseudo-Scientist, Lunatics, and the Rest of Us Systematically Fail to Think Rationally” by Dawes (2001)

So…Are we hopelessly irrational decision makers?

GARY KLEIN“What really happened is that Kahneman and Tversky designed their studies to demonstrate the limits of classical decision theory, not the limits of their subjects”

Two System Brain

SYSTEM 1

Automatic Quick Little or no effort No sense of voluntary control Operates below our consciousness

(mostly)

SYSTEM 2

Effortful Complex computations Choice Concentration Consciousness

Two System Brain

Synaptic Connections

DOPAMINE

Produces good feelings Expectations Amplified - Cortex

EXAMPLES

Iowa Gambling Task Lt Riley

IMPLICATIONS

Fire Fighters Code Blue Emergencies Driving

Dopamine

EXAMPLES

Yale Undergrads vs. Lab Rats Apple iPods

IMPLICATIONS

Stock Investing Investment Bubbles

Interaction Between System 1 and System 2

Shopping Choices

Making Shopping Decisions

APPLICATIONS – COGNITIVE BIASES

Control the data Know when you are susceptible

APPLICATIONS – SYSTEM 1 OR SYSTEM 2

Less Important – System 2 More Important – System 1 Predictable Patterns – System 2 (maybe) Random Patterns – System 1 Puzzles vs. Mysteries

APPLICATIONS – IMPROVING DECISIONS Embrace Uncertainty Focus on Errors THINK ABOUT THINKING

OVER-COMING ERRORS

Start with realistic anchors – GIGO Build expertise Put Judgments into perspective Represent data in a more usable

fashion