Decision Making On Money, Love, Work & Health: Why Decisions Errors Are Made

Decision Making
Decision making is something that happens throughout our day but with different degrees of importance, urgency and consequential outcomes.
Your life at this very moment is the result of every decision you have made along the way. There is no doubt how easy life will turn out to be, if we can make good decisions quickly and easily. But we both know that in reality decision making is not that clear cut!
Everyone makes wrong decisions sometimes or bad ones for that. I am sure you can recall moments where you said to yourself, “I wish I didn't make THAT decision”.
How many times have you heard stories about smart people making stupid decisions with their money? This happens all too often and baffles everyone. Have you ever wondered why intelligent, sensible people make such mistakes and rash decisions?

Guidelines, strategies that tell us how to make a decision. Sadly, it doesn’t always produce a correct answer. However, sometimes they are the reasons why people make the wrong decisions.

Given below are such 12 such heuristics, with reference to the book, Changing Minds In Detail. (A slight tilt towards psychology)

1. We Are Too Confident In Our Own Judgments

(Overconfidence barrier)Over confidence is feeling of exaggerated trust in someone or something, which is in decision making process, especially in evaluation of alternatives.

2. Our Moods Bias Our Judgments

(Mood-Congruent Judgment)When we are in a good mood, we see the world in a more friendly light, and our judgments are more positive. Likewise, when we are grumpy we evaluate things around us as being bad.

3. We Value Certain Gains & Try To Avoid Certain Losses

(Prospect Theory)We tend to value a gain, that is certain more than a gain that is less than certain, even when the expected value of each is the same. The opposite is even truer for losses: we will clutch at straws to avoid a certain loss, even if it means taking even greater risks.

4. We Are Reluctant To Pull Out Of An Investment

(Sunk-Cost Effect)We all know that we can reverse the past, and we can’t get back money or time that we already spent. But many people irrationally take sunk costs, time, money, or other resources which have already been spent and can't be recovered, into their decision making.

5. We Pay More Attention To Some Facts, Than Others

(Focusing Effect)When we are making judgments, we tend to weigh attributes and factors unevenly, putting more importance on some aspects and less on others.
This is typically due to factors such as stereotyping and schemas that we use that bring certain factors to mind and downplay others.

6. We Value More Highly The Things We Own

(Endowment Effect)The endowment effect, also known as “status quo bias”, is the phenomenon in which most people would demand a considerably higher price for a product that they own than they would be prepared to pay for it.

7. Agreeing With What Supports Beliefs And Vice Versa

(Disconfirmation bias)When people are faced with evidence for and against their beliefs, they will be more likely to accept the evidence that supports their beliefs with little scrutiny yet criticize and reject that which disconfirms their beliefs.

8. We Only Use Limited Logic In Decisions

(Bounded Rationality)We will try to logically understand things and make sensible choices. However, the world is large and complex, and we do not have the capacity to understand everything. We also have a limited time in which to make decisions.

9. We Prefer A Known Probability To An Unknown One

(Ambiguity Effect)When people make decisions, sometimes they have a good understanding of the probability of something happening whilst other times the situation is ambiguous, whereby the probability of the event is unknown. In such situations, people are more likely to choose the former situation, preferring a known probability over an unknown probability.

10. Recent Events Seem More Likely

(Availability Heuristic)We make a judgment based on what we can remember, rather than complete data. In particular, we use this for judging frequency or likelihood of events. Since we remember recent experiences or reports, then the news has a significant effect on our decisions.

11. We Base Decisions On Available Small Samples

(Biased sampling)When we need to make a decision and when we have very little real information about the subject in question, we will blithely base our decision on that very limited and hence biased sample.
For example, if we go to a restaurant for one meal and then someone asks us what the restaurant is like, we will give an authoritative pronouncement, based on that single experience.

12. Belief We Can Predict Random Events

(Gambler's Fallacy)I toss a coin and it comes down heads. I expect the next coin to be more likely to be tails than heads. It comes down heads. Now I am even more convinced that the subsequent coin will very likely be tails. If I am a betting person, I might double my bet each time, sure that I will walk away a winner.

13. Assuming Success Breeds Success

(Hot Hand Phenomenon)When a person succeeds at something then they are more likely to succeed in subsequent attempts, whereas the truth is that they are still governed by the laws of chanced.
Whilst there is some truth in this in that a person may be particularly fit or their confidence is boosted by an initial success, the 'Hot Hand' phenomenon goes past this where people make assumptions that are statistically inaccurate.

Has your decision making been influenced by the above heuristics? Was the outcome good/bad ?

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14 comments:

suZen said...

That was the most thorough list I've ever seen! I could relate to using just about every one of those things at one time or another in making decisions. I'm so pathetic making decisions I can't even think of how to comment on this! But I enjoyed it! :)

Shamelle said...

@SuZen: Thanks, I guess reading this brings back memories of the "wrong" decisions we've made. Don't be so hard on yourself :-0)

Walter said...

The facts you enumerated above we religiously abide without being aware of it. I'm oftentimes feel regret when I made those mistakes because I have allowed myself to fool me again.

WE must be aware of our propensities in order to overcome our setbacks in decision-making.

Shamelle said...

@Walter: well said, "We must be aware of our propensities in order to overcome our setbacks in decision making"

Stephen - Rat Race Trap said...

Shamelle, that was an excellent article. Outstanding as a matter of fact. I loved it and bookmarked it. I'll stumble and tweet it. Well done!

Michelle said...

Really great article. This seems to perfectly pinpoint exactly what people do. It all rings so true. Decision making is such an important thing to reflect on, since it affects everything. Thanks for the post.

Shamelle said...

@Stephen: Thanks, Stephen.

@Michelle: Sometimes we wonder why we make certain decisions. I guess this provides some "Aha" moments.

positivelypresent said...

Great post!

Shamelle said...

@positivelypresent: Thanks, Dani.

jonathan figaro said...

As long as we keep our mind focused on how to think positive you can becoem successful. Take daily steps each day inorder to grow, and you success is assured.

Mia said...

Brilliant post, thank you for linking to the psychological theories underpinning each phenomenon. Perhaps we should all pool our efforts and resources into designing a super robot to make all of our decisions for us? It's scary to think how arbitrary and biased our decisions are even. We think of them as being quite rational and balanced.

angela said...

Great article, it has touched where i was still wondering how do i go wrong! and just a day i should really see it. Thanks alot.

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