January 2013 – “Cognitive Decision Making”

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

Quiz  In 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