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decision making Archives - SUE Behavioural Design

How to design for intelligent decision making? Mental models

By | All, Behavioural Science, Personal Development

We want to introduce you to one of our intellectual heroes. A man who turned 95 on January 1st of 2019. There’s a fair chance that you’ve never heard about him. But you definitely have heard about his 88 years old associate, Warren Buffett. The man we’re talking about is Charlie Munger.

Charlie Munger

Worldly Wisdom

Charlie Munger became a hero to many people who are interested in better decision-making with a famous lecture he gave in 1994 at USC business school. The talk was called “A Lesson on Elementary, Worldly Wisdom As It Relates To Investment Management & Business”. You can’t find it on Youtube, but the transcript was published on the blog of startup Incubator Ycombinator and in the curious book “Poor Charlie’s Almanack, The Wit and Wisdom of Charles T. Munger“.

I want to urge you to read the transcript of the lecture. It’s one of the most exciting texts you will ever read. I re-read it at least three times per year. In this lecture on Worldly Wisdom, Charlie Munger argues that the reason why Munger and Buffett beat the market with their investments, for more than 60 years is that they have a different approach to decision making. Munger argues that if you want to make better decisions, you need to use more than one mental models to look a the problem. One of his famous quotes to make his point is the following:

“To a man with a hammer, every problem looks like a nail”.

He argues that most people in business, everyday life and investing approach problems from a single mental model. If you work in branding, everything looks like a branding problem, if you work in business consulting, everything sounds like a transformation problem. If you are an economist, everything looks like a market-problem.

Munger and Buffett pride themselves with locking themselves up most of the day, reading books. What they are looking for is elementary worldly wisdom.They are obsessed with learning interesting “mental models”. Mental models are concepts from all kinds of sciences that offer elegant explanations to the world. To quote Munger:

“What is elementary, worldly wisdom? Well, the first rule is that you can’t really know anything if you just remember isolated facts and try and bang ’em back. If the facts don’t hang together on a latticework of theory, you don’t have them in a usable form.

You’ve got to have models in your head. And you’ve got to array your experience—both vicarious and direct—on this latticework of models. You may have noticed students who just try to remember and pound back what is remembered. Well, they fail in school and in life. You’ve got to hang experience on a latticework of models in your head”.

A list of mental models.

There’s a lot of renewed excitement for Munger’s idea of Mental Models. Shane Parish, host of the amazing podcast “The Knowledge Project” and author of Farnamstreet, the ultimate blog on better decision-making by learning from the smartest people in the world. Shane Parish is writing a book on the subject. He recently published a post called “Mental Models, the best way to make intelligent decisions (109 models explained)“. It’s a list of all the mental models that he is using in his daily life. A lot of these models are concepts from cognitive psychology and the science of influence.  BTW, Munger is also fascinated with how human decision-making works. If you understand how people think and why they do what they do, you can do a much better job at predicting and changing their behaviour.

Want to learn more:

  1. Here’s another great blogposts on Mental models (Thanks for sharing: Ed Borsboom)
  2. Start making a list of your favorite mental models in your todo-list. I use Wunderlist. I created a folder “Mental Models” and started the habit to post concepts I use a lot in my thinking. My most recent one is this: “You are the sum of the five people you hang around with”.
  3. Re-read your mental model list regularly. Once you use them to look at challenges or problems, they will always provide you with new ways of looking at the problem and its solutions.

Enjoy Munger while he’s still alive. 🙂
Kind regards,

Tom, Astrid and the SUE | Behavioural Design Team

PS: We had Munger’s mental models in mind when we designed the program of the Behavioural Design Acacademy master classes. Our program is designed to teach you some very powerful and easy to remember mental models for finding human insights and for coming up with smart interventions for behavioural change. #funfact.

Kahneman fast and slow thinking explained

By | Behavioural Science

Excerpt: this is a reference page on which you can find the fundamentals of Kahneman’s breakthrough work on human decision making explained. It will address his discovery of fast and slow thinking, and the importance of our unconscious mind in making decisions and influencing behaviour.

 

Kahneman Fast and Slow thinking

On this page, we want to give you a quick guide to Daniel Kahneman’s groundbreaking work about decision making. Maybe you’ve already heard of system 1 and system 2. Or you’ve heard Kahneman was the first psychologist to win the Nobel prize for economics in 2002. Could be you’ve heard about cognitive biases and heuristics. Enough to be intrigued. He is one of our heroes and the godfather of behavioural economics. We’ll give you the highlights of Kahneman’s thinking which he published in his best-selling book ‘Thinking Fast and Slow.’

This isn’t so much an article, but more a reference page that you can consult whenever you want to know more or reread about Kahneman. To make your life a bit easier we have created page sections, so you can easily jump to a particular subject that is of particular interest to you. We also have included links into this page to more detailed information if you want to dive a bit deeper. The page sections:

System 1 and 2
The power of your subconscious mind
Heuristic: definition and meaning
Cognitive bias

System 1 and system 2

The groundbreaking research of Daniel Kahneman showed that our brain has two operating systems, which he called system 1 and system 2. These are the differences between the two systems of our brain:

System 1

  • FAST
  • DEFINING CHARACTERISTICS: unconscious, automatic, effortless
  • WITHOUT self-awareness or control “What you see is all there is.”
  • ROLE: Assesses the situation, delivers updates
  • Makes 97% of all our thinking

System 2

  • SLOW
  • DEFINING CHARACTERISTICS: deliberate and conscious, effortful, controlled mental process, rational thinking
  • WITH self-awareness or control, logical and skeptical
  • ROLE: seeks new/missing information, makes decisions
  • Makes 3% if all our thinking

system 1 and 2 Kahneman

Knowing this you could say that our system 2 is a slave to our system 1. Our system 1 sends suggestions to our system 2, who then turns them into beliefs. If you want to know more about the differences between system 1 and 2, we’ve made a more elaborate overview of the main characteristics of system 1 and 2. If you’d like to hear Daniel Kahneman himself explain the concept of system 1 and 2, this is a short but good video to watch. It is only 6.35 minutes long.

 

The power of your subconscious mind

By discovering not only the two operating systems of our brain but especially the bandwidth of each system was what made this research so significant. It was a breakthrough insight into the lack of reasoning in human decision-making. He showed how the two thought systems arrive at different results even given the same inputs. And foremost he revealed the power of the subconscious mind. Where we all tend to think we’re rational human beings that think about our decisions, and the things we do. Kahneman showed we’re (almost) completely irrational. But that’s a good thing. It’s our survival mechanism.

On average we all have about 35,000 decisions to make each day. These differ in difficulty and importance. It could be you taking a step to your left or right when talking, or deciding to take the stairs or elevator. But they all hit you on a daily basis. If you had to consciously process all these decisions your brain would crash. Your automatic system’s primary task is to protect your deliberate, system 2. It helps you prevent cognitive overload.

There are a few ways that our automatic system lightens the load on our deliberate system. First of all, it takes care of our more familiar tasks by turning them into autopilot routines, also known as habits. But what your system 1 is primarily doing without you even noticing it, is rapidly sifting through information and ideas. Prioritizing whatever seems relevant, and filtering out the rest by taking shortcuts. These shortcuts are also called heuristics. We’ll explain to you all about them in the next section.

For now the most important to remember is that we all have to accept that we are irrational human beings. Almost all of the time. Even if you think you’re not, you’re probably not rationally thinking. Somehow we can accept our irrationality, or at least understand it when it is explained to us. But we keep making the mistake when trying to influence someone, that we forget they are irrational too. We so often try to convince somebody with rational arguments or facts. We love to tell someone about the benefits of our products or services or ideas.

But understand that the decision of the person you’re trying to convince isn’t based on this rational information. It’s based on system 1 shortcuts. What the work of Kahneman shows is that people struggle with statistics or cannot reason probable outcomes of their decisions. A second very important insight from the work of Kahneman is that our decisions are driven by heuristics and biases. We’ll dive deeper into those in the next two sections.

Heuristic: definition and meaning

The shortcuts our system 1 makes Kahneman calls heuristics. The definition of a heuristic, as can be found on Wikipedia, is:

Any approach to problem-solving, learning, or discovery that employs a practical method, not guaranteed to be optimal, perfect, logical, or rational, but instead sufficient for reaching an immediate goal. Where finding an optimal solution is impossible or impractical, heuristic methods can be used to speed up the process of finding a satisfactory solution. Heuristics can be mental shortcuts that ease the cognitive load of making a decision.

If we bring it back to Kahneman’s thinking, a heuristic is simply put the shortcut our automatic (system 1) brain makes to save mental energy of our deliberate (system 2) brain. Our survival mechanism at play. You probably are already familiar with the way we describe the experience of heuristics. We sometimes refer to them as our gut feeling, a guestimate, our common sense or our intuition. We use heuristics for problem-solving that isn’t a routine or a habit. The way we ‘build’ heuristics is by reviewing the information at hand and connecting that information to our experience. Heuristics are strategies derived from previous experiences with similar problems. The most common heuristic is the trial and error heuristic. It is trying to solve a problem based on experience instead of theory.

Another example of a heuristic is the so-called availability heuristic. When making a decision, this heuristic provides us with a mental short-cut that relies on immediate cases that come to a given person’s mind. Or easier put: we value information that springs to mind quickly as being more significant. So, when you have to make a decision, we automatically think about related events or situations. As a result, we might judge that those events are more frequent or probable than others. You have a greater belief in this information. And we tend to overestimate the probability and likelihood of similar things happening in the future.

The problem with heuristics is that sometimes they are wrong. They are nothing more than mental shortcuts that usually involve focusing on one aspect of a complex problem and ignoring others. Therefore heuristics affect our decision-making and subsequently our and also our customer’s behaviour.

Cognitive bias

With all this in mind, you could say that Kahneman has discovered something very interesting about our cognitive abilities as human beings. It’s good to be clear about the meaning of cognition. If we look up the definition in the dictionary it says:

The mental action or process of acquiring knowledge and understanding through thought, experience, and the senses.

What Kahneman discovered is truly paradigm shifting, breakthrough thinking that can even hurt egos. We are far less rational and far less correct in our thinking than we’d like to think or give ourselves credit for. The side-effect of heuristics is that we all suffer from cognitive bias. A cognitive bias refers to a systematic pattern of deviation from norm or rationality in judgment, whereby inferences about other people and situations may be drawn in an illogical fashion. Individuals create their own ‘subjective social reality’ from their perception of the input.

There are a lot of cognitive biases. If you look on Wikipedia, you can find an extensive list of cognitive biases. You can take a look there to or check out an overview we made of the most common cognitive biases. The most important thing to remember is that we all base our decisions on a heuristic. And we all are influenced by our cognitive biases. By being aware of the most common biases, you can anticipate on them.

 

Cognitive bias in recruitment

To give you an example that ties up all the concepts of Kahneman discussed in this post: think about recruitment. If you have to interview a person for a position in your team or organization, the chance of this person is getting hired is proven to be established in the first 10 minutes. What happens? A person steps into the room. Your system I makes a fast, mostly unconscious judgment based on heuristics that lead to certain biases in your judgment. The person is similar to you, your system I instantly like him or her (liking bias). The person wears glasses, your system I thinks he or she is smart (stereotyping bias). It all goes fast.

Your system I has sent these suggestions to your system II without you even noticing it. And your system II turns those into beliefs. The rest of the interview your system II looks for affirmation of the system I suggestions. Our brain simply loves consistency; it lowers our mental stress or cognitive overload. And there you go, you base your final judgment on the two operating systems of your brain helped by heuristics and skewed by cognitive bias. And we do this all day, in all kinds of situations.

 

To sum it up

By understanding Kahneman you can understand human decision-making. And if you understand human-decision making, you can understand human or customer behaviour. You can see how we are predictably irrational (Dan Ariely wrote a beautiful book with this title, which we can highly recommend). We just have to accept our own irrationality. And understand that if we want to convince someone or try to nudge them into certain behaviour, that they are just irrational too.

 

Would you like to know more?