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Saturday, 28 May 2011

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

Decision MakingDecision 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)

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