Tag: Decision Making

Social Dilemmas: When to Defect and When to Cooperate

Social dilemmas arise when an individual receives a higher payoff for defecting than cooperating when everyone else cooperates. When everyone defects they are worse off. That is, each member has a clear and unambiguous incentive to make a choice, which if made by all members provides a worse outcome.

A great example of a social dilemma is to imagine yourself out with a group of your friends for dinner. Before the meal, you all agree to share the cost equally. Looking at the menu you see a lot of items that appeal to you but are outside of your budget.

Pondering on this, you realize that you’re only on the hook for 1/(number of friends at the dinner) of the bill. Now you can enjoy yourself without having to pay the full cost.

But what if everyone at the table realized the same thing? My guess is you’d all be stunned by the bill, even the tragedy of the commons.

This is a very simple example but you can map this to the business word by thinking about healthcare and insurance.

If that sounds a lot like game theory, you’re on the right track.

I came across an excellent paper[1] by Robyn Dawes and David Messick, which takes a closer look at social dilemmas.

A Psychological Analysis of Social Dilemmas

In the case of the public good, one strategy that has been employed is to create a moral sense of duty to support it—for instance, the public television station that one watches. The attempt is to reframe the decision as doing one’s duty rather than making a difference—again, in the wellbeing of the station watched. The injection of a moral element changes the calculation from “Will I make a difference” to “I must pay for the benefit I get.”

The final illustration, the shared meal and its more serious counterparts, requires yet another approach. Here there is no hierarchy, as in the organizational example, that can be relied upon to solve the problem. With the shared meal, all the diners need to be aware of the temptation that they have and there need to be mutually agreed-upon limits to constrain the diners. Alternatively, the rule needs to be changed so that everyone pays for what they ordered. The latter arrangement creates responsibility in that all know that they will pay for what they order. Such voluntary arrangements may be difficult to arrange in some cases. With the medical insurance, the insurance company may recognize the risk and insist on a principle of co-payments for medical services. This is a step in the direction of paying for one’s own meal, but it allows part of the “meal’ ‘ to be shared and part of it to be paid for by the one who ordered it.

The fishing version is more difficult. To make those harvesting the fish pay for some of the costs of the catch would require some sort of taxation to deter the unbridled exploitation of the fishery. Taxation, however, leads to tax avoidance or evasion. But those who harvest the fish would have no incentive to report their catches accurately or at all, especially if they were particularly successful, which simultaneously means particularly successfully—compared to others at least—in contributing to the problem of a subsequently reduced yield. Voluntary self-restraint would be punished as those with less of that personal quality would thrive while those with more would suffer. Conscience, as Hardin (1968) noted, would be self-eliminating. …

Relatively minor changes in the social environment can induce major changes in decision making because these minor changes can change the perceived appropriateness of a situation. One variable that has been shown to make such a difference is whether the decision maker sees herself as an individual or as a part of a group.

Footnotes
  • 1

    Dawes RM, Messick M (2000) Social Dilemmas. Int J Psychol 35(2):111–116

Bruce Pandolfini Teaches Thinking, Not Chess

Bruce Pandolfini doesn’t have an MBA but he knows more about strategy than most people. Pandolfini is one of the most sought-after chess teachers in the world.

He’s also one of the most widely read chess writers. I have a copy of Pandolfini’s Ultimate Guide to Chess on my bookshelf.

Pandolfini makes it clear to his students that he’s not teaching them how to play chess. He is, instead, teaching them how to think.

“My goal,” he says, “is to help them develop what I consider to be two of the most important forms of intelligence: the ability to read other people, and the ability to understand oneself. Those are the two kinds of intelligence that you need to succeed at chess — and in life.”

On Thinking Ahead

There are lots of misperceptions that influence how people think about — and play — chess. Most people believe that great players strategize by thinking far into the future, by thinking 10 or 15 moves ahead. That’s just not true. Chess players look only as far into the future as they need to, and that usually means thinking just a few moves ahead. Thinking too far ahead is a waste of time: The information is uncertain. The situation is ambiguous. Chess is about controlling the situation at hand. You want to determine your own future. You certainly don’t want your opponent to determine it for you. For that, you need clarity, not clairvoyance.

“You should never play the first good move that comes into your head. Put that move on your list, and then ask yourself if there is an even better move.”

On Attacking

Great players want to build their position and to increase their power — so that, when they strike, there is no defense. Trying to win a game in the fewest number of moves means hoping that your opponent is incompetent. I don’t teach students to base their play on hope. I teach them to play for control.

On Small Advantages

Chess is a game of small advantages. It all goes back to Wilhelm Steinitz, the first great modern chess teacher. Steinitz developed the theory of positional chess, which assumes that, to get an advantage, you have to give up something in return. The question then becomes “How can anyone win? Why isn’t the game always held in dynamic balance?” The answer is that you play for seemingly insignificant advantages — advantages that your opponent doesn’t notice or that he dismisses, thinking, “Big deal, you can have that.” It could be a slightly better development, or a slightly safer king’s position. Slightly, slightly, slightly. None of those “slightlys” mean anything on their own, but add up seven or eight of them, and you have control. Now the only way that your opponent can possibly break your control is by giving up something else. Positional chess teaches that we are responsible for our actions. Every move must have a purpose.

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The Anatomy of a Decision: An Introduction to Decision Making

“The only proven way to raise your odds of making a good decision is
to learn to use a good decision-making process—one that can
get you the best solution with a minimal
loss of time, energy, money, and composure.”
— John Hammond

***

This is an introduction to decision making.

A good decision-making process can literally change the world.

Consider the following example from Predictable Surprises: In 1962, when spy planes spotted Soviet missiles in Cuba, U.S. military leaders urged President Kennedy to authorize an immediate attack. Fresh from the bruising failure of the Bay of Pigs, Kennedy instead set up a structured decision-making process to evaluate his options. In a precursor of the Devil’s Advocacy method, Kennedy established two groups each including government officials and outside experts, to develop and evaluate the two main options–attack Cuba or set up a blockade to prevent more missiles from reaching its shores. Based on the groups’ analysis and debate, Kennedy decided to establish a blockade. The Soviets backed down, and nuclear war was averted. Recently available documents suggest that if the United States had invaded Cuba, the consequences would have been catastrophic: Soviet missiles that had not been located by U.S. Intelligence could still have struck several U.S. cities.

The concept of a decision-making process can be found in the early history of thinking. Decisions should be the result of rational and deliberate reasoning.

Plato argues that human knowledge can be derived based on reason alone using deduction and self-evident propositions. Aristotle formalized logic with logical proofs where someone could reasonably determine if a conclusion was true or false.

However, as we will discover, not all decisions are perfectly rational. Often, we let our system one thinking–intuition–make decisions for us. Our intuition is based on long-term memory that has been primarily acquired over the years through learning and allows our mind to process and judge without conscious awareness. System one thinking, however, does not always lead to optimal solutions and often tricks our mind to thinking that consequences and second-order effects are either non-existent or less probable than reality would indicate.

In Predictable Surprises Max Bazerman writes:

Rigorous decision analysis combines a systematic assessment of the probabilities of future events with a hard-headed evaluation of the costs and benefits of particular outcomes. As such, it can be an invaluable tool in helping organizations overcome the biases that hinder them in estimating the likelihood of unpleasant events. Decision analysis begins with a clear definition of the decision to be made, followed by an explicit statement of objectives and explicit criteria for assessing the “goodness” of alternative courses of action, by which we mean the net cost or benefit as perceived by the decision-maker. The next steps involve identifying potential courses of action and their consequences. Because these elements often are laid out visually in a decision tree, this technique is known as “decision tree analysis.” Finally, the technique instructs decision-makers to explicitly assess and make trade-offs based on the potential costs and benefits of different courses of action.

To conduct a proper decision analysis, leaders must carefully quantify costs and benefits, their tolerance for accepting risk, and the extent of uncertainty associated with different potential outcomes. These assumptions are inherently subjective, but the process of quantification is nonetheless extremely valuable’ it forces participants to express their assumptions and beliefs, thereby making them transparent and subject to challenge and improvement.

From Judgment in Management Decision Making by Max Bazerman:

The term judgment refers to the cognitive aspects of the decision-making process. To fully understand judgment, we must first identify the components of the decision-making process that require it.

Let’s look at six steps you should take, either implicitly or explicitly, when applying a “rational” decision-making process to each scenario.

1. Define the problem. (M)anagers often act without a thorough understanding of the problem to be solved, leading them to solve the wrong problem. Accurate judgment is required to identify and define the problem. Managers often err by (a) defining the problem in terms of a proposed solution, (b) missing a bigger problem, or (c) diagnosing the problem in terms of its symptoms. Your goal should be to solve the problem not just eliminate its temporary symptoms.

2. Identify the criteria. Most decisions require you to accomplish more than one objective. When buying a car, you may want to maximize fuel economy, minimize cost, maximize comfort, and so on. The rational decision maker will identify all relevant criteria in the decision-making process.

3. Weight the criteria. Different criteria will vary in importance to a decision maker. Rational decision makers will know the relative value they place on each of the criteria identified. The value may be specified in dollars, points, or whatever scoring system makes sense.

4. Generate alternatives. The fourth step in the decision-making process requires identification of possible courses of action. Decision makers often spend an inappropriate amount of search time seeking alternatives, thus creating a barrier to effective decision making. An optimal search continues only until the cost of the search outweighs the value of added information.

5. Rate each alternative on each criterion. How well will each of the alternative solutions achieve each of the defined criteria? This is often the most difficult stage of the decision-making process, as it typically requires us to forecast future events. The rational decision maker carefully assesses the potential consequences on each of the identified criteria of selecting each of the alternative solutions.

6. Compute the optimal decision. Ideally, after all of the first five steps have been completed, the process of computing the optimal decision consists of (a) multiplying the ratings in step 5 by the weight of each criterion, (b) adding up the weighted ratings across all of the criteria for each alternative, and (c) choosing the solution with the highest sum of weighted ratings.

Hammond, Keeney, and Raiffa suggest 8 steps in their book Smart Choices:

1. Work on the right problem.
2. Identify all criteria.
3. Create imaginative alternatives.
4. Understand the consequences.
5. Grapple with your tradeoffs.
6. Clarify your uncertainties.
7. Think hard about your risk tolerance.
8. Consider linked decisions.

* * *

People, however, are not always entirely logical machines. In Judgment in Managerial Decision Making, the distinction between System One and System Two thinking becomes clear:

System 1 thinking refers to our intuitive system, which is typically fast, automatic, effortless, implicit, and emotional. We make most decisions in life using System 1 thinking. For instance, we usually decide how to interpret verbal language or visual information automatically and unconsciously. By contrast, System 2 refers to reasoning that is slower, conscious, effortful, explicit, and logical. System 2 thinking can be broken down into (1) define the problem; (2) identify the criteria; (3) weigh the criteria; (4) generate alternatives; (5) rate each alternative on each criterion; (6) compute the optimal decision.

In most situations, our system 1 thinking is quite sufficient; it would be impractical, for example, to logically reason through every choice we make while shopping for groceries. But System 2 logic should preferably influence our most important decisions.

* * *

When making a decision, we are psychologically influenced either consciously or unconsciously. By exploring these biases and other elementary, worldly wisdom, we hope to make you a better decision-maker.

Following a rational decision process can help us focus on outcomes that are low in probability but high in potential costs. Without easily quantifiable costs, we often dismiss low probability events or fall prey to biases. We don’t want to be the fragilista.

Even rational decision-making processes like the one presented above make several assumptions. The first assumption is that a rational decision-maker is completely informed which means they know about all the possible options and outcomes. The second major assumption is that the decision-maker does not fall prey to any biases that might impact the rational decision.

In researching decision-making processes, it struck us as odd that few people question the information upon which criteria are measured. For instance, if you are purchasing a car and use fuel efficiency as the sole criterion for decision making, you would need to make sure that the cars under consideration were all tested and measured fuel consumption in the same way. This second order of thinking can help you make better decisions.

If you want to make better decisions, you should read Judgment in Managerial Decision Making. That is the best book I’ve come across on decision making. If you know of a better one, please send me an email.

Stanovich’s book, What Intelligence Tests Miss: The Psychology of Rational Thought, proposes a whole range of cognitive abilities and dispositions independent of intelligence that have at least as much to do with whether we think and behave rationally.

 

Follow your curiosity to The best books on the psychology behind human decision making and Problem Solving 101.