Organisational Change Management Volume 2

32. Concepts of Thinking, eg self-control, ego, discipline, flow, intelligence, rationality, intuition, aversion, etc

{product-noshow 20|name|cart|picture|link|border|menuid:206|pricedis3|pricetax1}

Introduction

. When performing mild exercise, there is a greater mental alertness. On the other hand, if we increase the degree of physical exertion, we are less able to engage in mental work ie there is a sharp deterioration in our ability to think coherently; especially if it involves the short-term memory. In addition to the physical effort of greater exertion, a mental effort of self-control is required to resist the urge to slow down. Self-control and deliberate thought currently draw on the same limited budget of energy.

. It is thought that frequent switching of tasks and speeding up mental work are not intrinsically pleasurable for our brains and people try to avoid them whenever possible.

. To develop an intricate argument under time pressure, we need to be physically still.

. Even in the absence of time pressure, maintaining a coherent train of thought requires discipline (thus effort and energy)

. On the other hand, people sometimes expend considerable efforts for long periods of time without exerting willpower. This is called "flow", ie

"...a state of effortless concentration so deep that they lose their sense of time, of themselves, of their problems..."and their descriptions of the joy of this state are very strong

Mihaly Csikszentmihalyi as quoted by Daniel Kahneman, 2012

There are 2 parts to flow, ie information on the task and the deliberate control of attention. In the state of flow, maintaining focused attention on the all-absorbing activities requires no exertion of self-control; this frees up resources for use elsewhere

. Self-control and cognitive effort are forms of mental work. Self-control of thoughts and behaviours requires attention, effort and use energy. Thus it is tiring. Many tasks are known to have a negative impact on self-control like conflict, need to suppress a natural tendency, trying to impress others, interacting with a person from a different group, etc.

. If you have to force yourself to do something, you are less willing or less able to exert self-control when the next challenge occurs. This is called ego depletion. The initial emotional effort reduces the ability to withstand the pain of sustained muscle contraction of the next challenge, eg next difficult cognitive task. Thus there is a greater urge to quit. Factors that can impact on ego depletion are our diets, overspending on impulsive purchases, reacting aggressively to provocation, performing poorly in cognitive tasks and logical decision-making, etc

- ego deletion is linked with motivation. If the incentive is strong enough, people can resist ego depletion.

- ego depletion is not the same mental state as cognitive busyness

. Performance can be disrupted by loading the short-term memory with pointless thoughts

. If somebody is simultaneously challenged by a demanding cognitive task and a temptation, the temptation is more likely to win

. Intelligence, ie

"...is not only the ability to reason; it is also the ability to find relevant material in memory and to deploy attention when needed..."

Daniel Kahneman, 2012

. Research (Daniel Kahneman, 2012) has shown self-control and intelligence are linked. Improve control of attention and intelligence improves

Food for thought

. The nervous system consumes more glucose than most other parts of the body; effortful mental activity is especially expensive in its demand for glucose. When involved in difficult cognitive reasoning or engaged in a task that requires self-control, your blood glucose levels drop. This is similar to a runner using stored muscular glucose when sprinting. Thus to handle self-control, ego depletion, etc, ingesting glucose is one way effective startegy. This restores the available sugar in the brain and prevents deterioration of performance, judgment, decision-making, etc. Research (Daniel Kahneman 2012) has shown that people make better decisions after eating some food, and poorer decisions when hungry.

Intuition (routine focus of the brain)

. Intuition = is knowing without knowing why, ie at first glance, knowing that something is a fake. It is based on memory. To develop intuitive expertise depends on the quality and speed of feedback plus sufficient opportunity to practice.

. In the case of subjective confidence, experts need to know the limits of their expertise, ie their confidence

. Intuition involves

"...The situation has provided a clue; this clue has given the expert access to information stored in memory, and the information provides the answer. Intuition is nothing more and nothing less than recognition......valid intuitions develop when experts have learned to recognise familiar elements in a new situation and to act in a manner that is appropriate to it.....professionals' intuitions do not all arise from true expertise..."

Herbert Simon as quoted by Daniel Kahneman, (2012)

. Intuitive heuristic

"...where judgements and decisions are guided correctly by feelings of liking and disliking, with little deliberation or reasoning......when faced with a difficult question the often answer an easier one instead usually without noticing the substitution..."

Herbert Simon as quoted by Daniel Kahneman, (2012)

. Routine focus of the brain is mainly based on impression, intentions and feelings.

. Beliefs are formed when rational thinking supports impressions and intuition.

. Rational conveys an image of greater deliberation, more calculation and less warmth; a rational person is regarded as reasonable. Yet non-psychologists, especially economists, look at rationality as being internally consistent rather than reasonable. It is logical coherence - reasonable or not. It demands adhering to rules of logic that our finite minds are not able to implement.

. Humans are not irrational but need help to make more accurate judgements and better decisions.

. People act in ways that seem odd, ie not in their long-term interest, but they could have a good reason to do so, ie people choosing not to save for old age or exposing themselves to addictive substances.

"...deviating from the normal choice is an act of commission, which requires more effortful deliberation, takes on more responsibility, and is more likely to evoke regret than doing nothing. These are powerful forces and that may guide decisions of someone who is otherwise unsure of what to do......Also need protection from others who would deliberately exploit their weaknesses..."

Daniel Kahneman, (2012)

. Intuition works well in 2 environments, ie

- is sufficiently regular to be predictable

- provides an opportunity to learn those regularities through prolonged practice

. The illusion of validity (have no idea what they do not know and what they are doing)

Ease & Coherence

. We are confident in the story we tell ourselves that comes easily to mind, has no contradiction and no competing scenario. But ease and coherence do not guarantee that a belief held with confidence is true. The associative machine is set to suppress doubts and evoke ideas and information that are comparable with the currently dominant story, ie

"...A mind that follows WYSIATI will achieve high confidence much too easily by ignoring what it does not know......the confidence that people have in their intuitions is not a reliable guide to their validity..."

Daniel Kahneman, (2012)

NB WYSIATI = What You See All There Is.

Associative Activation

. Associative activation involves the deliberate use of a word to trigger many other ideas; in a spreading cascade of activity in your brain.

. It is linked with coherence and called associative coherence, ie each element is connected and each supports and strengthens the other. The word evokes memories, which evoke emotion, which invokes facial expressions and other reactions like tensing up and avoidance tendency. The facial expression and the avoidance motion intensify feelings to which they are linked, and feelings in turn reinforce compatible ideas. It is a self-reinforcing pattern of cognitive, emotional and physical responses.

"...by linking the words in a casual story; it elevated the possible threat (mild to moderate) and created a context of future developments by preparing you for events that have just become more likely..."

Daniel Kahneman, 2012

"...You think with your body, not only with your brain..."

Daniel Kahneman, 2012

. This is linked with association of ideas, ieideas follow each other in our conscious mind in a fairly orderly way. According to David Hume (18th century), there are 3 elements of association, ie resemblance, contiguity in time and place, and causality.

. An idea can be expressed in various ways:

- as an abstract or concrete concept

- as a verb, noun, adjective, etc

- via body language, e.g.a clenched fist

. Associative memory involves each idea being linked to many others. Some links include

- cause and effect

- properties

- categories

. Sometimes this is referred to as priming, ie using a word or concept or idea to prime other concepts or ideas or behaviours. Ideomotor effect is used to describe the influence on an action by the idea and/or gesture and/or environment. For example, the use of words like fragile, bald, forgetful, grey, lonely, wrinkled, etc can make people who hear those words behave as if they are old - even though the word "old"has not been spoken.

. Your actions and emotions can be primed by events of which you are not even aware.

. It has been demonstrated that using the word money as a primer promotes individualism; there is an observable reluctance

- to be involved with others

- to depend on others

- accept demands from others

. Our routine focus of the brain

"...provides impressions that often turn into your beliefs and is the source of the impulses that become your choices and your actions. It offers a tacit interpretation of what happens to you and around you, linking the present with the recent past and with expectations about the near future..."

Daniel Kahneman, 2012

Illusions of Truth

. Illusions of Truth/cognitive ease

"...predictable illusions inevitably occur if a judgement is based on an impression......Anything that makes it easier for associative machinery to run smoothly also biases beliefs. A reliable way to make people believe in falsehoods is frequent repetition......you do not have to repeat the entire statement for a fact or idea to make it appear true......the familiarity of one phrase in a statement sufficed to make the whole statement feel familiar, and therefore true..."

Daniel Kahneman, 2012

. State of cognitive ease means that you

- are in a good mood

- believe what you hear and see

- trust your routine focus of the brain

- feel comfortable

On the other hand, you are relatively casual and superficial in your thinking, less vigilant and suspicious, and likely to make more errors, etc

. To reduce cognitive strain and to persuade people, you need to

i) maximise legibility by printing message, using good quality paper that maximises the contrast between characters and their background, use colour (especially bright blue or red, rather than middling shades of green, yellow or pale blue

ii) use simple language as it helps with thought credibility and intelligence, ie couching familiar ideas in pretentious language is counter-productive

iii) make it memorable, ie put ideas in verse, use rhyme, alliteration...

iv) if quoting a source, choose one with a name that is easy to pronounce

. We are all guided by our first impression.

. How do you know if a statement is true? It helps if it

i) Is strongly linked by logic to our beliefs or preferences

ii) comes from a source that you trust and like

iii) promotes a sense of cognitive ease (see above)

. To overcome the illusions of truth and a default preference for a "lazy approach", you need to be strongly motivated.

. Self-reinforced reciprocity is linked with cognitive ease as it shifts people's approach to problems from a casual routine focus of the brain mode to a more engaged and analytical mode.

. Recognition ease is linked with good feelings; repetition induces cognitive ease and a comfortable feeling of familiarity; it does not have to be a conscious experience.

. To survive in a dangerous world, organisms need to react cautiously to novel stimulus, ie with withdrawal and fear. This is linked with survival, ie suspicious of novelty. Initial caution will fade if the stimulus is actually safe; safety is good. There is a link between positive emotion and cognitive ease.

. Creativity is associated memory that works exceptionally well

. Mood can influence performance. When we are in a good mood, performance improves significantly, ie

"...When we are uncomfortable and unhappy, we lose touch with our intuition..."

Daniel Kahneman, 2012

When in a good mood, people become more intuitive and creative but also less vigilant and more prone to logical errors

. The role of cognitive ease (priming, etc) in judgement is very strong

. Surprise - it is a sensitive indicator. There are 2 main varieties

i) active and conscious, eg we are waiting for a particular event to happen

ii) not actively expected, eg meeting someone unexpectedly

. The brain readily registers the violation of normality, ie abnormality is detected very quickly

. The brain automatically searches for causality, ie a large event is supposed to have consequences, and consequences need causes

. When uncertain, answers are guided by experience with recent events and the current context having most weight in determining an interpretation; conscious doubt is not included

. In understanding a statement, the brain must begin with an attempt to believe it, ie you first must know what the idea would mean. Only then can you decide whether or not to believe it.

Law of Least Effort

. Routine focus of the brain is linked with "Law of least effort/cognitive ease/laziness"

. As the brain is generally busy and/or trying to conserve energy, its preferred thinking mode can be called "law of least effort", "cognitive ease"or "laziness". As a result it finds it easier to agree to false statements rather than challenging them. Challenging them requires the brain to work and use energy. This helps explain why empty persuasive messages, such as those in commercials, can be effective, especially when we are tired, ie our brains are tired and uncritically accepting of suggestions including exaggerations. At the same time, the brain has a preference for looking at the worst scenario. This is why extreme and improbable events, etc get preference in our thought patterns. Thus many intuitive beliefs are endorsed even though they are inaccurate; routine focus of the brain will influence the most careful decisions, ie its inputs never cease. This can involve jumping to conclusions on the basis of limited evidence, ie

"...Continuously monitors what is going on inside and outside the mind......assessments of various aspects situation......with little or no effort. These basic assessments play an important role in intuitive judgement, because they are easily substituted for more difficult questions..."

Daniel Kahneman 2012

. This is also linked with the support for substitution of one judgment for another, ie the ability to translate values across dimensions

. This is the basis for biases

Bias (see other parts of this volume)

. Confirmation bias, ie confirming evidence, is linked with associated memory. For example, people prefer to seek data, information, etc that is compatible with their beliefs rather than those that will challenge them.

. Halo bias, ie the tendency to like, or dislike, everything about one a person or thing (this includes what has not necessarily been observed). This bias may result from a reaction to a person's voice or appearance. It is heavily reliant on first impressions and this can be determined by chance. The sequence matters as the first impression dominates the subsequent impressions. The gaps in your knowledge about the personal situation are filled in by guesses that fit one's emotional response to the personal situation. At the same time, as you become more familiar with the person or situation, evidence accumulates and attaches to your first impression. So sometimes a halo effect suppresses ambiguity and exacerbates the initial mis-impression.

WYSIATI

. WYSIATI (What You See All There Is) - how the mind uses information that is currently available and unavailable. An essential design feature of associative machine is that it represents only activated ideas. Thus information that is not retrieved, even unconsciously, from the memory might as well not exist. Routine focus of the brain excels at constructing the best possible story that incorporates only ideas currently activated, irrespective of their accuracy and incomplete information. Routine focus of the brain

"...Is radically sensitive to both quality and quantity of information and gives rise to impressions..."

Daniel Kahneman 2012

. Research has shown (Daniel Kahneman 2012) that when people are given only one side of evidence, they are more confident in their judgments than those who understand both sides, ie they are convinced by the coherence of the story that they managed to construct from available information, ie

"...It is the consistency of the information that matters for a good story, not its completeness...... You will often find that knowing little makes it easier to fit everything you know into a coherent pattern..."

Daniel Kahneman 2012

"...WYSIATI facilitates the achievement of coherence and of cognitive ease that causes you to accept a statement as true. It explains why we can think fast and how we are able to make sense of partial information in a complex world. Much of the time, the coherent story put together is close enough to reality to support reason or action......to help explain a long and diverse list of biases of judgement and choice..."

Daniel Kahneman 2012

. Some of these WYSATI habits include

- overconfidence (neither the quantity nor the quality of the evidence counts much in subjective confidence; the quality of the story is actually more important than the facts; consequently, critical evidence, doubts and ambiguity are often ignored)

- framing (different ways of presenting the same information often evoke different emotions, eg survival rate versus mortality rate from surgery. Survival rate puts a positive spin; while mortality puts a negative spin)

- base-rate neglect (stereo-typing, such as making personality generalisations, eg all doctors have the same personality, etc)

Eyes and Brain

"...Whenever your eyes are open, the brain computes a three dimensional representation of what is in your field of vision, completes the shapes of objects, their position in space, and their identity. No intention is needed to trigger this operation......in contrast to these routine assessments; other computations are undertaken only when needed......the occasional judgements are involuntary. They only occur when you intend them to do so..."

Daniel Kahneman 2012

Heuristic

. Definition of heuristic = simple procedure that helps find adequate, though often imperfect, answers to difficult questions, ie people make judgements on probabilities without knowing precisely what probability means, ie people want to simplify the difficult tasks

. It is linked with substitution, ie substituting one question for another in order to solve difficult problems, ie

"...If you can't solve a problem, then there is an easier problem you can solve: find it..."

George Polya as quoted by Daniel Kahneman 2012

. This is linked with our imprecise control over targeting our responses to questions, eg

"...There is a heuristic alternative to careful reasoning, which sometimes works fairly well and sometimes leads to serious errors..."

Daniel Kahneman 2012

Target question

Heuristic question

1. How much would you contribute to save an endangered species?

1. How much emotion do I feel when I think about dying dolphins?

2. How happy are you in your life these days?

2. What is my mood right now?

3. How popular will the president be 6 months from now?

3. How popular is the president right now?

4. How should financial advisers who prey on the elderly be punished?

4. How much anger do I feel when I think of financial predators?

5. This woman is running for the primary. How far will she go in politics?

5. Does this woman look like a political winner?

6. What do I think about it?

6. How do I feel about it?

Daniel Kahneman 2012

. The right-hand questions are easier to answer than the left hand ones, ie your feelings about dolphins, financial criminals, your current mood, etc than the left-hand questions about endangered species, happiness, etc

. Intensity matching, ie how strong are your views on a particular issue?

3-D heuristic illusion

. 3-D heuristic involves the substitution of 3-dimensional for 2-dimensional size and being influenced by the question that was not asked. This means an answer requires a fair amount of thinking. People's likes and dislikes determine their beliefs and this can interfere, ie your political preferences determine which arguments you find compelling; if you like something, you will see more benefits than risk; if you dislike something, you will see more risks and fewer benefits.

Self-criticism

. It requires thinking as it is processing information that can be challenging to existing beliefs

Sampling

. A statistical relationship does not mean causality, ie sense of causation.

. Wide fluctuations are more likely to be found in small rather than large samples as they may be due to an accident of sampling. This is called an artefact, ie some observations are produced entirely by the method of research.

. Sampling variation is a concern in research. Using a sufficiently large sample is the only way to reduce the risk.

Routine Focus of the Brain

. Routine focus of the brain tends to suppress ambiguity and spontaneously construct stories that are as coherent as possible. Unless the message is immediately negated, the associations that it will spread as if the message were true. While cognitive thinking is capable of doubt (ie maintaining incompatible possibilities at the same time), sustaining doubt is harder work than sliding into certainty. The brain prefers certainty to doubt, ie as less thinking is involved, it uses less energy.

. Routine focus of the brain runs ahead of the facts, constructing a rich image on the basis of scraps of evidence

. We are prone to exaggerate the consistency and coherence of what we see

. Halo effect can involve thinking we understand a person about whom we actually know very little.

. Causal thinking exposes us to mistakes in evaluating the randomness of truly random events.

. We are pattern seekers, ie we believe in a coherent world and order in which regularities appear not by accident but by mechanical causality and/or someone's intention.

. There is a tendency to see patterns in randomness. If you follow your routine focus of the brain, you will more likely err by mass classifying a random event as systematic, ie

"...we are far too willing to reject the belief that much of what we see in life is random..."

Daniel Kahneman 2012

For example, most people expect that small schools/classroom size perform better than large schools/classroom size. The truth is that small schools are not better on average; they are simply more variable.

. We pay more attention to the content of the message and information than about their reliability. As a result, we end up with a view of the world that is simpler and more coherent than the data justifies, ie

"...jumping to conclusions is a safer sport in the world of our imagination than it is in reality..."

Daniel Kahneman 2012

"...Statistics produced many observations that appear to beg for causal explanations but do not let themselves to such explanations. Many facts of the world are due to chance, including accidents of sampling. Causal explanations of chance events are inevitably wrong..."

Daniel Kahneman 2012

Anchoring Affect

. Anchoring affect occurs when people consider a particular value for an unknown quantity before estimating that quantity, ie the estimates stay close to the numbers that people consider.

. Two different mechanisms can produce an anchoring affect, ie a deliberate process of adjustment, and the process of priming (selectively evoking comparable evidence)

. Can use an "adjust-and-anchor"heuristic as a strategy for estimating uncertain quantities, ie start with an anchoring number, assess whether it is too high or too low, and adjust. This is like coming off at a freeway exit, where you tend to drive too fast

. People adjust less, ie stay closer to the anchor, when they are tired, and/or memory is overloaded, and/or drunk, etc. As adjustment is a deliberate attempt, it requires effort.

. Many systematic errors make us gullible and prone to believe whatever we believe in!

. People who ask difficult questions will clutch at straws and the anchor is a plausible straw.

. Anchoring in facts can be studied in tasks which involve judgment and choice working on data that is retrieved from memory (an automatic and involuntary operation. Thus anchoring is susceptible to information that is easier to retrieve. Remember: a message, unless it is immediately rejected as a lie, will have the same effect on the associative process - regardless of its reliability; the key to the message is the story which is based on whatever information is available. That holds, even if the quantity of the information is slight and its quality is poor

. Anchoring results from associated activation; whether the story is true or believable is not important.

. Random anchors are extreme cases as they provide no information

. Priming can be affected by variety, ie your thoughts and behaviours may be influenced by the a stimulus of which you are not aware, ie the major influence is the "environment of the moment". It does not necessarily respond to subjective experience

. To handle anchoring, we there is a need for a strategy of deliberately thinking the opposite of the anchor

. Availability heuristic, ie when we asked ourselves what people acts you do when they wish to estimate the frequency of the category, like dangerous plans. It is the process of judging frequency by the ease with which instances come to mind. It involves substituting one question for another, ie estimate the size of a category or the frequency of an event. Substitution of questions produces systematic errors.

. A salient event that attracts attention will be easily retrieved from memory, eg divorce scandal amongst politicians. This will be exaggerated.

. A dramatic event temporally temporarily increases the availability of its category, like a plane crash

. Personal experiences, pictures and vivid examples are more available than incidents that happen to others. The same bias happens in collaborative teams when team members feel they have done more than their fair share and others are not adequately grateful

. Resisting a large collection of attention of the available biases is very tiresome, ie energy expensive. On the other hand, maintaining one's vigilance against biases can be worthwhile if it helps avoid a costly mistake.

Availability, Emotion and Risk

Availability

. Believe that they use something

. People are less confident in their choice when they are asked to produce further arguments to support it

. People are less confident that an event was avoidable after listing more ways it could have been avoided

. People are less impressed about something after listing many of its advantages

. The proof that you truly understand a pattern of behaviour is that you know how to reverse it!!!!!

. People sometimes rely more on content rather than by ease of retrieval.

. Routine approach of the brain has the ability to set expectations and to be surprised when these expectations are violated. It will retrieve possible causes of a surprise, usually by finding a plausible cause among recent surprises.

. Most impacted by the ease of retrieval than the content they retrieve when:

- they are engaged in another effortful task at the same time

- when they are in a good mood

- when they score low on a depression scale

- they are knowledgeable novices on the topic of the task, in contrast to true experts

- they score high on a scale of faith in intuition if they are, or made to feel, powerful

Availability, emotion and risk

. As memory of a disaster dims over time, so does worry and diligence; with thus there is growing complacency about the occurrence of another disaster. Also preventative measures are based on the worst disaster actually experienced.

. Unusual events attract disproportionate attention and are consequently perceived as less usual than they really are, ie

"...The world in our heads is not a precise replica of reality; our expectations about the frequency of events are distorted by the relevance and emotional intensity of the messages to which we are exposed..."

Daniel Kahneman 2012

. People make judgements and decisions by consulting their emotions, ie do I like it? Do I hate it? How strongly do I feel about it?, ie decision-making

"...people form opinions that directly express their feelings and their basic tendency to approach for or avoid, often without knowing they are doing so.....people's emotional evaluations of outcomes, and the bodily states and the approach and avoidance tendencies they are satiated with, all play a central role in guiding decision-making..."

Daniel Kahneman 2012

"...the emotional tail wags the irrational dog..."

Jonathan Haidt as quoted by Daniel Kahneman 2012

"... Simplifies our lives by creating a world that is much tidier than reality...... All decisions are easy. In the real world, of course, we often face painful trade-offs between benefits and costs..."

Daniel Kahneman 2012

"...a picture of Mr and Mrs Citizen......guided by emotion rather than by reason, easily swayed by trivial details, and innately sensitive to differences between low and negligibly low probabilities..."

Daniel Kahneman 2012

. Experts show the same biases as the rest of us but in an accentuated form; it can reflect a difference in values, eg experts can measure risk by the number of deaths while the public draws a fine distinction between "good"and "bad"deaths, etc. Thus risk and its measurement can be thought of as subjective. How we deal with small risks, ie we either ignore them or give them too much credibility. The amount of concern is not adequately sensitive to the probability of harm. There can be gross exaggeration of minor threats, often with important consequences.

"...our minds are strongly biased toward causal explanations and do not deal well with mere statistics. When our attention is called to an event, associative memory will look for its cause - more precisely, activation will automatically spread to any cause that is already stored in the memory..."

Daniel Kahneman 2012

"...Our almost unlimited ability to ignore our ignorance..."

Daniel Kahneman 2012

"...A general limitation of the human mind is its imperfect ability to reconstruct past states of knowledge, or beliefs that have changed. Once you adopt the new view of the world...... You are immediately losing much of your ability to recall what you used to believe before your mind changed..."

Daniel Kahneman 2012

Characteristics of Routine Focus of the Brain

. Generates impressions, feelings and inclinations that, if reinforced, become beliefs, attitudes and intentions

. Operates automatically and quickly, with little or no effort, and no sense of voluntary control

. Can be programmed to mobilise attention when a particular pattern is detected

. Executes skilled responses and generates skilled reactions after adequate training

. Creates a coherent pattern of activated ideas in associative memory

. Links a sense of cognitive ease to illustrations of truth, pleasant feelings and reduced vigilance

. Distinguishes the surprising from the normal

. Infers and invents causes and intentions

. Neglects ambiguity and suppresses doubt

. Is biased to believe and confirm

. Exaggerates emotional consistency (halo effect)

. Focuses on existing evidence and ignores absent evidence (wysiata)

. Generates a limited set of basic assessments

. Represents sets by norms and prototypes; does not integrate

. Matches intensities across scales, eg size to loudness

. Computes more than intended (mental shot gun)

. Sometimes substitutes an easy answer for a difficult one (heuristics)

. Is more sensitive to changes than states (prospect theory )

. Overweight low probabilities

. Shows diminishing sensitivity to quantity (psychophysics)

. Responds more strongly to losses than to gains (loss aversion)

. Frames decision problems narrowly, in isolation from one another

Intuitive Predictions, etc

. Intuitive predictions tend to be overconfident and overly extreme. To handle this bias, we need to know the baseline and evaluate the quality of the evidence.

"...A preference for unbiased prediction is justified if all errors are treated alike, regardless of their direction..."

Daniel Kahneman 2012

. In general terms, your intuition will deliver predictions that are too extreme and you will put too much faith in them.

Narrative fallacy

. Narrative fallacy = flawed stories of the past shape our views of the world and our expectations of the future; they are important for a continuous attempt to make sense of the world; we focus on a few striking events that happen, rather on the countless events that failed to happen.

. Inconsistencies reduce needs of our thoughts and clarity of our feelings

"...The amount of evidence and its quality do not count for much, because evidence can make a very good story. For some of our most important beliefs we have no evidence at all, except the people we love and trust hold these beliefs. Considering how little we know, the confidence we have in our beliefs is preposterous - and it is also essential..."

Daniel Kahneman 2012

Events

. There are some events that you are sure of, ie the sun rising each morning; other events that are considered impossible, like the Pacific Ocean freezing all at once. On the other hand, there are many events that will have a degree of probability to occur, eg rise and fall of stock market.

. Understanding statistical annoyances like correlation and regression is not easy for the brain. It involves matching predictions to the evidence and is not intuitively done.

Probability

. Probability reflects a likelihood that is related to uncertainty, propensity, plausibility, vagueness and surprise

. When you have doubts about the quality of evidence, you need to engage the executive function of the brain - which requires effort

. Bayesian statistics - it looks at the logic of how people change their minds in the light of evidence. It specifies that prior beliefs should be combined with the diagnostic analysis of evidence, ie the degree to which it favours the hypothesis over the alternative. It can be summarized

"...Anchor your judgment on a probability of an outcome on a plausible base rate and question the diagnosticity of your evidence..."

Daniel Kahneman 2012

Conjunction Fallacy

. Conjunction fallacy (people commit to judging a conjunction of 2 events; it can be described as a conflict between intuition and logic

"...Representativeness belongs to a cluster of closely related basic assessments that are likely to be generated together. The most representative outcome combines with the personality description to produce the most coherent story. The most coherent stories are not necessarily the most probable, but they are plausible, and the notion of coherence, plausibility, and probability are easily confused by the unwary..."

Daniel Kahneman 2012

. Question phrased as "how many"makes you think of individuals but when it is rephrased "as what percentage"it does not

Accuracy of Predictions

"...The main point......is not that people who attempt to predict the future make many errors......is that errors of prediction are inevitable because the world is unpredictable. The second is that highly subjective confidence is not to be trusted as an indicator of accuracy......Short-term trends can be forecast, and behaviour and achievements can be predicted with fair accuracy from previous behaviours and achievements......behaviour both on the test and in the real world is determined by many factors that are specific to a particular situation......The question is not whether these experts are well trained. It's whether their world is predictable......The score in the contest between algorithms and humans has not changed. About 60% of studies have shown significantly better accuracy for the algorithms......In every case, the accuracy of experts was matched or exceeded by a simple algorithm...... Inferiority of expert judgment is that humans are incorrigibly inconsistent in making summary judgments of complex information.....to maximise predictive accuracy, final decision should be left to formulas, especially in low-validity environments..."

Daniel Kahneman 2012

"...Statistical algorithms greatly out-do humans in noisy environments for two reasons: they are more likely than human judges to detect weakly valid cues and much more likely to maintain a modest level of accuracy by using such cues consistently..."

Daniel Kahneman 2012

Forecasting

. Involves subjective confidence as many experts do not know the limits of their expertise and are not judges of accuracy. They have intuitive skills in some of the tasks but have not learnt to identify situations and tasks in which intuition will betray them. The unrecognised limits of professional skill help explain why experts are often overconfident and wrong.

. If an environment is sufficiently regular and somebody has had the chance to learn these regularities, there is a strong chance that their predictions and decisions will be accurate. However, in an irregular environment, there is a strong chance that predictions and decisions will not be accurate.

. Short-term anticipation and long-term forecasting are different tasks.

. Planning fallacy = our estimates are closer to best-case-scenario than realistic assessment be improved by consulting the statistics of similar scenarios. Some examples of planning fallacy include

- the building of the Scottish parliament was estimated to cost 40 m pounds in 1997; yet the final cost was roughly 431 m pounds in 2004

- in 2005 study of railway projects undertaken worldwide between 1969 and 1998, over 90% had overestimated passenger usage

"...The relevant tendency to under weight or ignore distributional information is perhaps the major source of error in forecasting. Planners should therefore make every effort to frame the forecasting problem so as to facilitate utilising all the distributional information that is available..."

Bent Flyvbjerg as quoted by Daniel Kahneman 2012

. This is called "taking the other or outside view", ie reference class forecasting that involves large databases based on information from both plans and outcomes of hundreds of projects all over the world. This helps identify an appropriate baseline plus supplies statistics to generate baseline predictions and use specific information to adjust the baseline predictions.

. Irrational perseverance = sometimeswe know the relevant data/information but do not think of applying it. We tend to ignore procedure that is guided by statistics and checklists, especially if it conflicts with our own point of view.

. Need to be careful of extrapolating in forecasting as unable to predict future events with any degree of accuracy as to be anticipated there is likelihood that something will go wrong.

. Just because something happened in the past, there is no guarantee that it will happen in the future.

. Baseline prediction = the prediction you make about something if you know nothing except the category to which it belongs. It is the anchor to further adjustments.

. Optimistic bias is a significant source of risk-taking. Generally people take risks because the odds are favourable, ie they accept some possibility of failure because the possibility of success is sufficient. To handle this bias there is a need for rational weighing of gains, losses and probabilities. Otherwise they over-estimate the benefits and under-estimate the cost (including potential for mistakes and miscalculations). Remember: people are overconfident of their ability to handle things and/or predict the future!!!! It is not easier to change direction with just a few facts that may contradict your point of view. It is a form of lethargy, ie an unwillingness to think about what has, or could, happen.

. Optimism is inherited, ie a preference for seeing the brighter side of everything. Generally, optimists are more cheerful and happy - therefore popular; more resilient; have a stronger immune system; better health, etc. Usually they are the inventors, entrepreneurs, leaders (political and military) who are seeking challenges and taking risks; they have been lucky; self-confident. An optimistic temperament encourages persistence in the face of obstacles

. Generally risk takers underestimate the odds they face and do not spend effort to find out what the odds are. For example, the chances of a small business surviving for 5 years in USA is 35%; yet individuals who start such businesses believe they have a 60+% chance of success, ie almost double the true value. But as the outcome of a start-up depends as much on their own efforts (like raising funds, handling stakeholders, etc) as their handling of competitors and changes in the marketplace. Remember: inadequate appreciation of the uncertainty of the environment inevitably results in decision-makers taking risks that they should avoid. In the marketplace, optimism is highly valued.

There can be collective blindness to risk and uncertainty as shown by the GFC that started in 2008

"...an unbiased appreciation of uncertainty is a cornerstone of rationality..."

Daniel Kahneman 2012

. Competition neglect = competitors' reactions are not part of the decision-making

. Hubris hypothesis = executives of an acquiring firm are simply less competent than they think they are. Many optimistic CEOs take excessive risks, like accruing large debts, overpaying for target firms, etc. Celebrity CEOs underperform non-celebrity CEOs

. Illusion of control = in explaining the past and predicting the future, we focus on the causal role of skill, and neglect the role of luck; we focus on what we know, neglecting what we do not know, making us very confident in our own beliefs

. Optimistic explanation style = contributes to resilience by defending one's self-image; it involves taking credit for successes but assuming little blame for failures; people have an exaggerated sense of their own importance; involves subjective confidence that is determined by the coherence of the story one has constructed, not by the quality and amount of information that supports it. One way to overcome this is to ask people to explore the outcome of a decision which proves to be a disaster, ie how would they handle this?, ie this legitimises doubt and reduces group think

Group Discussion

. One of the best ways reduce group think is to ask everyone to write down their views before open discussion starts and these views are collected confidentially and recorded

. Another way to overcome group think is to ask people to explore the outcome of a decision which proves to be a disaster, ie how would they handle this?, ie this legitimises doubt

 

Basis for Economic Theory

. Basis for economic theory is incorrect

"...The agent of economic theory is rational, selfish, and his tastes do not change..."

Bruno Frey as quoted by Daniel Kahneman 2012

. This is an economist's approach while a psychologist would say that people are neither fully rational nor completely selfish and their tastes are not constant. People's view of the world is limited by the information that is available at the time.

. Decision-making - every significant choice we make in life comes with some uncertainty.

. Expected utility theory is the foundation of rational-agent model, ie choices are not based on dollar values but on the psychological values of outcomes (utilities). It is logic of choice based on elementary rules (axioms) of rationality including probability. It has a dual role as a logic that prescribes how decisions should be made and as a description of how choices are made by rational people. In contrast, psychologists look at humans actually making choices without assuming anything about their rationality. This involves judgement and intuitive preferences. Psychologists look for systematic violations of the axioms of rationality in choice.

. Framing = the large changes of preferences that are sometimes caused by inconsequential variations in the wording of a choice problem

. Prospect theory = facts about choices. This is linked with psychophysics, ie relate the subjective quantity in the observer's mind to the objective quantity in the material world. This includes physical quantity like energy of light, frequency of tone, amount of money, etc and subjective experience of brightness, pitch or value.

. Fechner's law = the psychological response to a change of wealth is inversely proportional to the initial amount of wealth

. Most people dislike risk and favour sure things. A decision maker with diminishing marginal utility for wealth will be risk averse.

. People become risk-seeking when all their options are bad.

Reference Point

. This involves thinking of outcomes in terms of losses and gain, not states of things like wealth. People dislike losing more than they like winning.

. Evaluation is relative to a neutral reference point (adaptation level). For financial outcomes, the usual reference point is the status quo or it can be the outcome you expect. Outcomes that are better than the reference points are gains; outcomes that are worse than reference points are losses. Gains are preferred to losses; losses have a greater impact than gains (loss aversion), ie threats (losses) have a greater impact than opportunities (gains). Furthermore, the principal of diminishing sensitivities applies to both dimensions, ie subjective difference between $900 and $1,000 is significantly smaller than the difference between $100 and $200. Thus people tend to evaluate gains and losses in relative rather than in absolute terms.

. An example of the importance of a reference point is golf, ie par put on each hole. A birdie (1 stroke under par) is a gain while a bogey (one stroke over par) is a loss. Comparing 3 situations, ie

i) putt to avoid a bogey

ii) putting for par (status quo)

iii) putt to achieve a birdie

. Failing to make a par is a loss, but missing a birdie putt is a foregone gain, not a loss. Analysing 2.5+ m putts, players were more successful when putting for a par than for a birdie. Also, there was an intense aversion to a bogey that was stronger than the potential to gain of a birdie

. Goals can be reference points; not achieving the goal can be seen as a loss, while exceeding the goal is a gain.

. Theory Induced Blindness = once you have accepted the theory and used it as a tool in your thinking, it is very difficult to notice its flaws

. Endowment effect = reluctance of people to part from assets that belong to their endowment; people are more worried about the loss of something they have had for a while than the possibility of gaining something they do not have; losses loom larger than corresponding gains. This is most noticeable when the asset under evaluation has given much pleasure. On the other hand, there is no endowment effect expected when owners view their goods as carriers of value to future exchange, like in routine commercial and financial markets.

. For people living in poverty, anything they receive is perceived as reducing losses, not necessarily as a gain. Because they are living below ones reference point, all their choices are between losses, as money spent on one good signifies a loss of another good that could have been purchased instead

Loss Aversion

. In decision-making, we face options, ie risk of loss and opportunity of gain. Your answer to the following question will indicate your risk aversion.

Q. You are offered a gamble on the toss of a coin.

- if the coin shows tails, you lose $100

- if the coin shows heads, you win $150

Is the gamble attractive? Would you accept it?

The response:

Need to balance the choice between the chance of gaining $150 against the chance of losing $100, ie you stand to gain more than you could lose.

If the fear of losing $100 is more intense than the chance of gaining $150, then you are risk averse, ie losses loom larger than gains.

Generally, if the potential gain is increased to $200, almost all accept the gamble, ie it is the smallest gain to balance the chance of losing $100. If asked to think like a trader, people become less loss averse and their emotional reaction to loss is less.

. Some more examples on the subjective impact of possible losses and offsetting gains:

- Consider a 50-50 gamble in which you can lose $10. What is the smallest gain that makes the gamble attractive?

- What about the possible loss of $500 on a coin toss? What possible gain the required to offset it?

- What about the loss of $2,000?

The response:

- if you say $10, you are indifferent to risk; if your answer is above $10, you are loss averse; if your answer is less than $10, you seek risk

- your loss aversion tends to increase when stakes rise but not dramatically unless it is potentially ruinous and/or your lifestyle is threatened

. In mixed situations, where both gain and loss are possible, loss aversion causes extreme risk aversion choices. In bad choices, where a sure loss is compared with a large loss that is merely probable, diminishing sensitivity causes risk taking

. People are guided more by the immediate emotional impact of gains and losses, not by long-term prospects of wealth and global utility

"...people evaluate many outcomes as gains and losses and that losses loom larger than gains......a biological and psychological view in which negativity and escape dominate positivity and approach..."

Daniel Kahneman 2012

"...the negative trump the positive in many ways, and loss aversion is one of the many manifestations of broad negativity dominance......bad information is processed more thoroughly than good. The self is more motivated to avoid bad self-definitions into good ones. Bad impressions and bad stereotypes are quicker to form a than good ones..."

Paul Rozin as quoted by Daniel Kahneman 2012

. It is widely accepted that stable relationships require good interactions to outnumber bad interactions by 5 to 1

. Loss aversion favours stability over change. The instability of preferences produces a preference for stability.

"...In addition to favouring stability over change, the combination of adaptation and loss aversion provides limited protection against regret and envy reducing the attractiveness of foregone alternatives and of others' endowments..."

Daniel Kahneman 2012

Negotiations

. Loss aversion creates an asymmetry that makes agreements difficult to reach as concessions can be seen as losses and cause much more pain than pleasure. Negotiations over a shrinking pie are especially difficult because they require an allocation of losses. On the other hand, people are much more receptive when bargaining over an expanding pie, ie negotiating over potential gains rather than losses.

. Negotiation is about communicating a reference point and providing an anchor to the other side. Sometimes messages in negotiations are not always sincere, ie pretend to have some attachment to a point of view that is really a bargaining chip (willing to give away in exchange for a concession).

. Like animals we fight harder to prevent losses than to achieve gains. This explains the success of defenders with territory holders winning the most challenges. This is similar to an organisation attempting to reform, restructure, etc itself. As any reform will produce winners and losers to achieve overall improved performance, whichever group has the most "political power"will prevail. For example, if the losers have the most political sway, the reforms will be weakened and results bias in their favour; like workforce reductions by attrition rather than by reduction, cuts in salaries and benefits apply only to future workers.

"...Loss aversion is a powerful conservative force that favours minimal changes from the status quo in the lives of both institutions and individuals...... reform will not pass. Those who stand to lose will fight harder than those who stand to gain..."

Daniel Kahneman 2012

Fairness

. Linked with gains and losses is the concept of fairness and unfairness (this goes against the economic theory that states behaviour is ruled by self interest). It is considered unfair for organisations to reduce existing wages and/or increase prices, rents, etc. Even though an organisation may change its prices, etc as a reflection of changing demand and supply, there is a moral component, ie the exploitation of market power that imposes losses on others in order to increase profit is unacceptable. Employers who violate rules of fairness are punished by reduced productivity, and merchants following unfair pricing practices can expect to lose sales, eg a buyer who purchases something that is later reduced in price will decrease future purchases by around 15% (Daniel Kahneman 2012), ie the buyer's reference point is the lower price and they perceive they have sustained a loss by paying more than appropriate.

"...Unfairly imposing losses on people can be risky if the victims are in a position to retaliate..."

Daniel Kahneman 2012

. Altruistic punishment - strangers who witness unfair behaviour often join in the punishment; this is accompanied by increased activity in the "pleasure centres"of the brain

"...It appears that maintaining the social order and rules of fairness in this fashion has its own reward. Altruistic punishment could be the glue that holds societies together..."

Daniel Kahneman 2012

. Our brains are not designed to reward generosity as reliably as they punish meanness; there is a marked asymmetry between losses and gains

. The influence of loss aversion and entitlements impacts on many aspects of our lives, such as in the administration of justice, financial transactions, etc. A firm whose goods were lost in transit may be compensated for costs actually incurred but is unlikely to be compensated for lost profit, ie the distinction is drawn in the law between restoring losses and for compensating for gains.

. Choices are not evaluated separately and independently

. The past and current situations are important as they provide valuable reference points

. The preference for status quo is a consequence of loss aversion. Also tastes are not fixed: they vary with the reference point; the disadvantage of a change looms larger than its advantages, which induces a bias in favour of the status quo

. Expectation principle = assigning weights (probabilities) to outcomes. This assumes decision-makers are rational, which we know they are not

. Possibility effect = involves a highly unlikely outcome being weighted disproportionally more than it deserves, eg buying a lottery ticket (has a very small chance of winning a large prize). We tend to downplay small risks and are willing to pay far more than expected value to eliminate them altogether

. Certainty effect = outcomes that are almost certain are given less weight than their probability justifies, ie over-weighting of small probabilities increases the attractiveness of, for example, gambling and insurance policies

. Both possibility and certainty have a powerful impact on the domain of losses, ie

"...The decision weights that people assigned to outcomes are not identical to the probability of these outcomes. Contrary to the expectation.....outcomes are overweight - this is the possibility effect. Outcomes that are almost certain are underweight relative to actual certainty......any weighing of uncertain outcomes that is not strictly proportional to probability lead to inconsistencies and other disasters..."

Daniel Kahneman 2012

"...People values to gains and losses rather than to wealth, and the decision weights that they assigned to outcomes are different from probabilities..."

Daniel Kahneman 2012

Emotions

. Important emotions - these include disappointment (anticipation), regret (the experience of an outcome depends on an option that you could have adopted but did not). These emotions are real and are involved in decision-making.

. "Emotion of the moment"is an important consideration in buying and selling. Selling goods that one would normally use activate regions of the brain that are associated with displeasure and pain. Buying also activates these areas and only when the prices are perceived to be too high; the brain also perceives buying at especially low prices a pleasurable event.

. The effect of price increases (losses relative to the reference point) is about twice as large as the effect of gains

Emotional response to gains/losses with high and low probabilities linked with gambling

organisational development change management

NB

. Choices are said to be risk averse if the sure thing is preferred, and risk seeking if the gamble is preferred

. The number 2 quadrant is where people who face bad options take desperate gambles to reduce the chance of experiencing a large loss. Risk-taking of this kind often turns manageable failures into disasters. The thought of accepting large sure losses is too painful and a hope of complete relief is too enticing to make the sensible decision to cut one's losses. For example, a firm losing business to superior technology can waste their remaining assets in a futile attempt to bridge the gap

Threats

. When you pay attention to threats, you worry. The degree of worry will reflect how much you worry rather than possibilities, probabilities, etc of the event occurring. Thus the worry is not proportional to the probability or possibility of the threat occurring. Reducing or mitigating the risk is not adequate; to eliminate the worry the probability must be zero

Terrorism and lotteries

. Terrorism, like suicide bombers on buses, creates an extremely vivid image of death and damage. This is reinforced by media attention and frequent conversations. It becomes highly accessible, especially if it is associated with a specific situation such as the sight of a bus. The emotional arousal is associative, automatic and uncontrollable and it produces an impulse for protective action. Even though the probability of an event is low, this does not eliminate the self-generated discomfort and a wish to avoid buses. The emotion is not only disproportionate to the probability; it is insensitive to the exact level of probability.

. The psychology of high-prized lotteries is similar to the psychology of terrorism, ie the thrilling possibility of winning the big prize is shared by the community and reinforced by conversations. Buying a ticket is immediately rewarded by pleasant fantasies, just as avoiding a bus is immediately rewarded by relief from fear.

. In both cases the actual probability is inconsequential, only the possibility matters.

Decision-making

. Don't under-estimate the role of emotions and circumstances in decision-making, especially in judgments of probabilities and possibilities. Remember that people overestimate and overweight, ie overestimate the probabilities of unlikely events and overweight unlikely events/outcomes in their decisions. This involves the following psychological mechanisms, ie focused attention, confirmation bias and cognitive ease. Entrepreneurs and investors are optimists who, when evaluating their prospects, are prone both to overestimate their chances and overweight their estimates of performance, ie planning fallacy.

. Need to go beyond decision weights that depend on probability and look at outcomes that include emotional reactions to actual and potential gains and losses. Furthermore, adding irrelevant but vivid details plus ease of imagining can confuse the decisions

. Different ways of communicating risk can impact upon decision-making. An actual number has a greater impact than a percentage. For example, if a children's vaccine has a chance of permanent disability risk of 0.001% is expressed as 1 In 100,000; the latter has a greater impact as it is called up an image of an individual child suffering.

. People tend to be risk averse in the domain of risk seeking re domain of losses. This can be costly as this attitude can make you pay a premium to obtain a short gain rather than face a gamble, and also make you willing to pay a premium to avoid a sure loss.

. Our preferences are not said to be coherent, because we tend to make decisions as problems arise, as our brains are averse to mental effort.

. Denominator neglect = low probability events are much more heavily weighted when described in terms of relative frequencies (how many) than when stated in more abstract terms of "chances", "risk", "probability"or "categories"(how likely)

Choice from Experience v. Description

. Choice from experience = underweighting is more common thanoverweighting. It represents many situations in which we are exposed to variable outcomes from the same source, eg your friend is usually good company but can sometimes be moody and aggressive

. Choice from description = rare outcomes are overweighted relative to their probabilities

. The probability of a rare event will most likely be overestimated because of the confirmatory bias of memory, ie thinking about that event you try to make it true in your mind

Framing (words)

. Narrow framing = treats each decision separately. It increases the emotional reaction to losses and decreases the willingness to take risks. Encourages a focus on short-term outcomes and this results in frequent changes of decisions and reduced performance

. Broad framing = treats decisions as part of a portfolio or group approach. It blunts the emotional reaction to losses and increases the willingness to take risks. Encourages a focus on long-term outcomes and usually results in better decisions and outcomes.

NB The pain of frequent small losses exceeds the pleasure of equally frequent small gains

. Emotionally loaded words quickly attract attention; with bad words, like crime, war, etc, attracting attention faster than do words like peace, love, etc. Even though there is no real threat, words can create a picture of an event. The mere reminder of a bad event is treated as threatening and can evoke an emotional reaction. For example, statements of opinion that strongly disagree with your own can be seen as a threat.

. Some examples on the importance of framing, ie words used

- the results of a soccer match, eg "Italy won"/ "France lost". Do these statements have the same meaning? They can evoke markedly different emotional responses and can have different meanings

- lotteries - a bad outcome is more acceptable if it is framed as the cost of lottery ticket that did not win than if it is simply described as losing a gamble, ie losses evoke stronger negative feelings than costs

- fuel stations - charge different prices for cash or credit purchases, ie cash is cheaper. It is called a cash discount, not a credit surcharge. People will more readily forego a discount and pay a surcharge

- "...The two may be economically equivalent, but they are not emotionally equivalent..."

- Daniel Kahneman 2012

- mortality - 90% survival sounds encouraging while 10% mortality sounds frightening

- opting in and opting out clauses - it is the best indicator of whether people will donate organs or not. The opt-out has a significantly higher adoption rate than the opt-in situation

. Choices are not reality-bound. The tendency to approach or avoid are revoked by the words used, ie loss v. gain, keep v. lose, etc. Our preferences are frame-bound rather than reality-bound. Risk-averse and risk-seeking preferences are not reality-bound. Preferences between the same objective outcomes with different formulations.

. Framing effect = people are more likely to choose the sure thing in the keep frame and more likely to accept the gamble than the loss. Even professionals react the same way as non-professionals. Your moral feelings are attached to the frames, ie their description of reality rather than to reality itself.

. Broadening frames leads to more rational decisions; conversely, narrowing frames leads to less rational decisions

. Cost-loss discrepancy = something is framed as a choice between a sure loss and a risk of greater loss, eg, insurance; losses are more aversive than costs

. Dead-loss effect = an individual's subjective state can be improved by framing negative outcomes as costs rather than as losses, eg paying a sport's membership fee and then experiencing an injury that means playing the sport is painful, many people will continue to endure the pain and play the sport as they have paid the membership fee (the fee would be a dead loss if the subscriber stopped playing)

Summary

"...The concept of utility and value are commonly used in two distinct senses: a) experience value, degree of pleasure or pain, satisfaction or anguish in the actual experience of an outcome; and (b) decision value, the contribution of anticipated outcome to the overall attractiveness or aversiveness of an option in a choice..."

Daniel Kahneman 2012

. This distinction is readily explained as it is assumed that decision values and experiences coincide. In the real world, the concept of an idealised decision maker who is able to predict future experiences with perfect accuracy and evaluate options accordingly is a myth.

. Remember: reference points are largely determined by the status quo plus expectations and social comparisons.

. The mismatch of decision values and experience values introduces an element of uncertainty into decision-making

. Sometimes evaluation of outcomes in the context of decisions not only anticipates experience but also moulds it

Overweighting

. Overweighting of a rare event is strengthened, eg tsunami - if it specifically attracts attention, there is obsessive concern, vivid images, concrete representations and explicit reminders.

. Our minds are not designed to handle rare probabilities.

. Familiar disaster cycle - begins with exaggeration and overweighting, then nothing happens... then neglect sets in.

Outside View & Risky Choice

. The outside view shifts the focus from the specifics of the current situation to the statistics of outcomes in similar situations. The outside view is a broad frame for thinking about plans. While a particular risky choice in a set of similar choices, eg insurance policy where you expect the occasional loss or the occasional failure of an uninsured product. The focus is on your ability to reduce or eliminate the pain of the occasional loss by the thought that policy has left you covered will be almost certainly be advantageous over the long term

. The outside view and the risk policies are remedies against 2 biases in decision-making, ie exaggerated opportunism of the planning fallacy and exaggerated caution induced by loss aversion. These 2 biases oppose each other with the exaggerated optimism protecting from the paralysing effects of loss aversion and loss aversion protecting from the follies of overconfident optimism.

. Optimists believe that the decisions they make are more prudent than they really are; loss-averse decision-makers correctly reject marginal propositions. For example, the top manager may be more optimistic than his line managers as the former can see the risks balancing themselves out while the latter sees all specific risks to his particular area of activity.

. Regret, frustration and self-satisfaction can also be affected by framing. These are known as secondary consequences and can be changed upon reflection.

Role of Money

. Except for the very poor where money coincides with survival, money is a proxy for points on a scale of self-regard and achievement. We keep a score of rewards, punishment, promises and threats in our heads. They shape our preferences and motivate our actions, ie

. we refuse to cut losses when doing so would admit defeat

. we are biased against actions that could lead to regret

. sharp distinction between omission and commission

. not doing and doing

NB the sense of responsibility is greater for one than the other and is linked with our emotions, ie a form of mental self-dealing or accounting that inevitably creates conflicts of interest. For example, we hold several bank accounts like for things like general savings, educational, medical emergencies, etc. There is a clear hierarchy in our willingness to draw on these accounts to cover current needs. We favour self-control, ie simultaneously putting money into a savings account and maintaining debit on credit cards.

. Mental accounting = a comprehensive view of outcomes that are driven by external incentives. It is a form of narrow framing that keeps things under control and manageable by a finite mind. Mental accounts are used extensively to keep score like golfers are keener to avoid a bogey than to achieve a birdie; another example: financial research has documented a strong preference for selling winners rather than losers in share trading (disposition effect) rather than the rational approach of selling the share that has the worst future prospect. If you care more about your wealth rather than your immediate emotions, you would sell the shares with the worst future prospects, rather than the winner. An additional issue is the taxation situation: realised losses reduces your taxes, while selling winners exposes you to more taxes. It is an instance of narrow framing

"...The emotions that people attached to the state of their mental accounts are not acknowledged in standard economic theory..."

Daniel Kahneman 2012

. Rational decision-making is only in the future consequences of current investments; justifying earlier mistakes is not included.

. Sunken cost fallacy = the decision to invest additional resources in a losing account when better investments are available. Many organisations "throw good money after bad"and keep investing in a poorly performing project rather than "cutting their losses and running". This is based on not accepting the humiliation of closing the account of a costly failure, ie where the choice is between a sure loss and an unfavourable gamble, the latter is often unwisely preferred. Sometimes a personal interest is involved as closing a poorly performing project will leave a permanent mark on an executive record or at least attempt to postpone the day of reckoning. This can result in the objectives of different stakeholders clashing (agency problem), eg top management wanted to keep the poorly performing activity going while the Board (looking after the shareholders' interests) wanted to stop the project.

. Sunken-cost fallacy keeps people for too long in poor jobs, working on underperforming projects, staying in unhappy marriages, working on promising research projects, etc

Regret

. It is an emotion and a form of punishment administered to us. The fear of regret is a factor in our decision-making and a familiar experience, ie "don't do this, you will regret it"is a common feeling. It is a counterfactual emotion that is triggered by the availability of an alternative to reality.

. Unusual events are easier than normal events to undo in the imagination; associated memory contains a representation of the normal world and its rules. An abnormal event attracts attention and activates the idea of the events that would be normal under the same circumstances.

. Decision-makers know that they are prone to regret, and anticipation of such a powerful emotion plays a part in many decisions. Intuitions about regret are remarkably uniform and compelling

"...People expect to have stronger emotional reactions (including regret) to an outcome that is produced by action and the same outcome when it is produced by inaction..."

Daniel Kahneman 2012

. Some examples

. gamblers are happier if they gamble and win than if they don't gamble but get the same amount of money

. saying yes is associated with much more regret than saying no if the outcome was bad.

It is a distinction between full options and actions that deviate from the default. If further fall is associated with bad consequences, the discrepancy can be painful.

. Asymmetry in the risk of regret favours conventional and risk-averse choices; and increasing preference conventional options. For example,

. favouring brand names over generics

. end of financial year clean-up of portfolios of unconventional and questionable stocks

Responsibility and other matters

. Losses are weighted about twice as much as gains in the following situations

i) gambles

ii) endowment effect

iii) reaction to price changes

. Taboo tradeoff = where no amount of money is sufficient to change your choice, ie increasing the chance of the death of your children

. Precautionary principle = prohibits any action that might cause harm. It imposes the entire burden of proving safety on anyone who undertakes actions that might harm people or the environment. The absence of scientific evidence of potential damage is not sufficient justification for taking risks. This approach is costly and can be paralyzing. For example, some inventions that would have not passed the test include airplanes, air-conditioning, antibiotics, automobiles, chlorine, measles vaccine, open-heart surgery, radio, refrigeration, smallpox vaccine and x-rays.

. Enhanced loss aversion = the dilemma between intensely loss-averse moral attitudes and efficient risk management is complicated.

. We spend much time anticipating and trying to avoid the emotional pain we inflict on ourselves.

. Poignancy = is counterfactual feeling, like regret, that involves mechanisms of substitution and intensity matching. Usually occurs when 2+ alternatives or scenarios are seen together.

. Category-boundary impact = a change from impossibility to possibility or from possibility to certainty has a bigger impact than the comparable change in the middle of the scale.

. Pseudo-certainty effect = an event that is actually uncertain is weighted as if it were certain

"...people greatly undervalued a reduction in the probability of a hazard in comparison to the complete elimination of that hazard. Hence, insurance should appear more attractive when it is framed as the elimination of risk than when it is described as a reduction of risk..... Evidently, the subjects adopted the descriptions of the outcomes as given in the question and evaluated the outcomes accordingly as gains or losses..."

Daniel Kahneman 2012

For example,

- in framing public health statements: the changing of words from "lives saved", eg survival, to "lives lost", eg mortality, induces a marked shift of preference from risk aversion to risk seeking.

- surgery versus radiation therapy - as the former involves a risk of death during treatment, the latter is the preferred treatment.

. Without distorting or suppressing information, decision-making can be influenced by the framing of outcomes and contingencies, eg price differences between cash and credit purchases are labeled cash discounts rather than credit card surcharges, ie, gain vs loss. As losses loom larger than gains, people are less likely to accept the surcharge than forego a discount.

Preference Reversal and associated matters

. We normally experience life in the between-subject mode in which contrasting alternatives that might change your mind are absent and WYSIATI. This means

"...the beliefs that you endorse when you reflect about morality do not necessarily govern your emotional reactions, and the moral intuitions that come to mind in different situations are not internally consistent. The discrepancy between single and joint evaluations...... belongs to a broad family of reversals of judgement and choice..."

Daniel Kahneman 2012

. For example, you are asked to choose between a safe bet and a risky one, ie an almost certain win of a modest amount, or a small chance to win a substantial larger amount and a higher probability of losing. Safety prevails and the first is the most popular choice. This can be reversed if each situation is evaluated separately and not compared.

Remember: individual choices do depend upon the context in which the choices are made, ie circumstances

. Our world is broken into categories which we have norms

"...Judgment and preferences are coherent within categories but potentially incoherent when the objects that we are evaluating different categories..."

Daniel Kahneman 2012

. Evaluability hypothesis = the number of entries is given no weight in single evaluation, because the numbers are not evaluable on their own. With joint evaluations it is immediately obvious that something is superior. Single evaluations are more likely to involve emotions; multiple evaluations tend to be more rational

. Neuro-economics = the study of what a person's brain does while making decisions. They have studied the flow of oxygen which is linked with heightened neuro-activity. There are 3 main findings

i) the region that is commonly associated with emotional arousal is the amygdale. It accesses very rapidly the emotional stimulus

ii) anterior cingulated is associated with conflict and self-control. It is most active when people do unnatural things

iii) frontal lobe combines both emotions and reasoning to guide decisions

. People tend to prefer the sure thing over the gamble (they are risk averse) when the outcomes are good. On the other hand, they tend to reject the sure thing and accept the gamble (they are risk seeking) when both outcomes are negative.

Remember: theories can survive for a long time even after conclusive evidence proves them to be false; need to frame outcomes in positives, like gains, pleasure, enjoyment, etc and not negatives like losses, pain, etc; the location of the reference point is pivotal in framing outcomes

. Utility = wantability

. Peak-end rule = the average level of emotions, like pain, pleasure, etc is reported at its peak and when it ceases. For example, storytelling: it is often the ending that defines the story, narrative, etc

. Duration neglect = the duration of the procedure had no effect whatsoever on the rating of the total emotions, like pain, pleasure, happiness, anger, worry, tough etc. It is the less-is-more effect.

On the other hand, duration can be an issue like a mother in labour (becomes more exhausted as time goes on), length of vacation (the longer it lasts, the more refreshed a person is), etc

"...We intuitively assess such episodes in the progressive deterioration or improvement of the ongoing experience, and how the person feels at the end..."

Daniel Kahneman 2012

Memories

. Experiencing-self = eg does it hurt now?

. Remembering-self = eg how was it, on the whole? It is strongly influenced by the peak and the end. It works by establishing stories and keeping them for future reference

"...Caring for people often takes the form of concern for the quality of their stories, not for their feelings..."

Daniel Kahneman 2012

. Confusing experience with memory is a cognitive illusion, ie it is the substitution that makes us believe our past experience. Remembering-self dominates experiencing-self in decision-making.

"...What we learn from the past is to maximise the quality of our future memories, not necessarily of our future experience..."

Daniel Kahneman 2012

. We select the option that you like the most, or disliked the least. Rules of memory determine how much we dislike or like.

. Taste and decisions are shaped by memories, and memories can be wrong. This challenges the idea that humans have consistent preferences and know how to maximize. There are inconsistencies, eg we have a strong preference about the duration of experiences of pain and pleasure. We want pain to be brief and pleasure to last. But we have evolved to remember the most intense period of pain or pleasure, ie the peak and the feeling when the episode finishes. We tend to remember the bad experiences more than the good experiences.

. Memories enhance the value of the experience.

. Memories are used to find presentable reasons stored in it but not necessarily the correct reason.

"...Memories......holds the vast repertory of skills we have acquired in a lifetime of practice, which automatically produce adequate solutions to challenges as they arise, from walking around a large stone on a path to averting the incipient outburst of a customer. The acquisition of skills required a regular environment, and adequate opportunity to practice, and rapid and unequivocal feedback about the correctness of thoughts and actions. When these conditions are fulfilled, skill eventually develops, and the intuitive judgments and choices that quickly come to mind will mostly be accurate......A marker of skilled performance is the ability to deal with vast amounts of information swiftly and efficiently..."

Daniel Kahneman 2012

More on Intuition & Emotional State

. Intuition has acquired a bad reputation as a source of errors and biases.

"...Its operative features which include WSIATA, intensity matching, associative coherence, amongst others, give rise to predictable biases and to cognitive illusions such as anchoring, non-regressive predictions, overconfidence, and numerous others like extreme predictions, planning fallacy, etc. What can be done about biases? How can we improve judgments and decisions, both our own and those of institutions that we serve and that serve us? The short answer is that little can be achieved without a considerable investment of effort...... Cognitive illusions are generally more difficult to recognise than perceptual illusions. The voice of reason may be much fainter than the loud and clear voice of an erroneous intuition, and questioning your intuition is unpleasant when you face the stress of a big decision......Organisations are better than individuals when it comes to avoiding errors, because they naturally think more slowly and have the power to impose orderly procedures......Such as reference-class forecasting and the pre-mortem. At least in part by providing a distinctive vocabulary, organisations can also encourage a culture in which people watch out for one another as they approach minefields. Whatever else it produces, an organisation effectively manufactures judgments and decisions...... Decisions are the framing of a problem that is to be solved, the collection of relevant information leading to a decision, and reflection and review. An organisation that seeks to improve its decision product should routinely look for efficient improvements at each of these stages..."

Daniel Kahneman 2012

. Intuition works by averages, norms and prototypes, not by sums. For example,the duration of an electric shock has little or no effect on fear; all that matters is the painful intensity of the stimulus.

. Happiness is a variant of positive feelings like love, joy, engagement, hope, amusement, etc; while negative emotions include anger, shame, depression, loneliness, etc

. Mood at work is less affected by factors that influence general job satisfaction including benefits and status; it is more impacted by situational factors: opportunity to socialise with co-workers, exposure to loud music, time pressure, immediate presence of a boss, etc

. Attention is the key

"...our emotional state is largely determined by what we attend to, and we are normally focused on current activities and immediate environment. There are exceptions, where the quality of the experience is dominated by re-current thoughts rather than by events of the moment..."

Daniel Kahneman 2012

. For example, the joy of love and emotions of grieving can far outweigh a current emotional situation.

. Attention improves performance in many numerous activities and is essential to some tasks, including comparisons, choice and ordered reasoning; but not necessarily rational thought.

. Some of the advantages of the associative memory

- distinguishes surprise from normal events in a fraction of a second

- immediately generates an idea of what was expected instead of a surprise

- automatically searches for some causal interpretation of the surprises and other events as they take place

Time Management

. The use of time is one area of our life over which people have some control, ie increasing amount of time doing things you like (socialising and exercise, etc), and decreasing time spent doing things you dislike (TV watching, etc)

Wellness

. More education is associated with higher evaluation of one's life, but not necessarily with greater experienced well-being as the more educated tend to have higher stress.

. Ill-health has a much stronger adverse effect on experience well-being than on life evaluation.

. Working in a toxic office is not good for your health (Helen Hawkes, 2015b). Conditions created poor air quality, poor building design, etc can have a detrimental effect on your health and wellness.
Symptoms of poor quality air are dizziness, nausea, discomfort (in eyes, nose and throat), itchy skin, fatigue and inability to concentrate.
Poor quality air is not helped with the pollutants like formaldehyde, volatile organic compounds (benzene and trichloroethylene), airborne biological pollutants, carbon monoxide, nitrogen oxide, pesticides, disinfectants (phenols), etc
Essential equipment should provide ergonomic benefits to improve musculoskeletal outcomes like
- document holders
- rests for wrists and feet,
- desks with adjustable heights to reduce the risk of repetitive strain injury
- chairs which provide support for your back
- antiglare filters on digital devices to reduce eyestrain, headaches and neck pain
- isolate printers as the toners emit volatile organic compounds
Also important are
- adequate ventilation, ie well maintained air-conditioning systems that remove carbon dioxide and other pollutants
- taking regular breaks every 30 minutes, ie the brain needs a rest; taking a short walk outdoors is beneficial. Activities like remedial massages, pilates, yoga, etc can help keep your spine in good order while building strong core muscles and increased energy reserves
- certain plants like peace lilies and rubber plants absorb pollutants and provide fresh air and humidity that makes us healthier
- phones and desks carry many thousands of germs per square centimetre, ie they harbour several hundred times more bacteria than the typical toilet seat!!!!!
The jury is still out on the impacts of electromagnetic radiation from computers
These are all additional to office politics which can be the most toxic of all on our health and well-being

. Living with children can pose a significant cost on feelings, like stress and anger; while the adverse effects on life evaluation are smaller.

. Religious participation has a relatively greater favourable impact on both positive effect and stress reduction than on life evaluation. Yet religion provides no reduction of feelings of depression or worry.

. Can money buy happiness? The answer is being poor makes one miserable while being rich may enhance one's life satisfaction but generally does not improve experienced well-being. Severe poverty amplifies the experienced effect of other misfortunes of life. For example, illness is much worse for the very poor than those who are wealthier.

. A headache doubles the proportion reporting sadness and worry to 38% in the top two thirds of income distribution.

. Experienced well-being no longer increases with household income above US$ 75,000, despite higher income allowing the purchase of many consumer durables and pleasures. As you buy more pleasurable experiences, you will lose some of the ability to enjoy the less expensive ones.

. There are clear contrasts between the effect of income on experienced well-being and on life satisfaction; higher income brings with it higher satisfaction.

. Once the novelty wears off, experienced well-being can diminish, eg marriage where newlyweds are generally considerably happier than older couples.

"...One reason for the low correlations between individuals' circumstances and their satisfaction with life is that both experienced happiness and life satisfaction are largely determined by the genetics of temperament. A disposition for well-being is as inheritable as height or intelligence as demonstrated by studies of twins separated at birth..."

Daniel Kahneman 2012

NB the picture is very situational, ie what is good for some people is bad for others; in new situations, there are both benefits and costs

. Well-being is linked to what people want, ie goals

. Where attention is focused will impact evaluation of happiness, etc

. Focusing illusion = nothing in life is as important as you think it is when you are thinking about it. For example, some people incorrectly think warmer climates are preferred to colder ones. This error is an exaggerated belief in the importance of climate for determining happiness.

. The essence of focusing illusion is WYSIATI and giving too much weight to climate as against other determinants of well-being, especially over time as the new situation becomes more familiar than the norm. Some exceptions to this are chronic pain, constant exposure to loud noise and severe depression. Pain is our biologically signals that attract attention, and depression involves reinforcing the cycle of miserable thoughts. There is no adaptation to these conditions, ie

"...Adaptation to a new situation, whether good or bad, consists in a large part of thinking less and less about it..."

Daniel Kahneman 2012

. One of the mistakes that people make in focusing illusion involves attention to selected moments and being neglectful of what happens at other times

. Miswanting = describes bad choices that arise from areas of affective forecasting. It makes us more likely to exaggerate the effect of a significant change of circumstances on a future well-being. It creates a bias in favour of goods and experiences that are initially exciting. Your new experiences are novel and exciting at the start but can eventually lose their appeal.

Time (stories & time)

. Describe the life-experiencing self as a series of moments, each with a value. The mind sees it differently. Remembering self tells stories and makes choices; neither the stories nor the choices properly represent time. In storytelling mode, an episode is represented by a few critical moments, especially the beginning, the peak and the end.

. As duration is neglected so is time neglected. This causes experiences that retain their attention value in the long term to be appreciated less than they deserve to be.

"...The mind is good with stories but does not appear to be well designed for the processing of time..."

Daniel Kahneman 2012

Goals

. Approximately 12,000 people at the age of around 18 and attending elite USA universities in 1976 were interviewed then and around 20 years later. Many students who gave a high ranking to "being very well-off financially"in 1976 had achieved it 20 years later.

. In setting goals, it is important to make them difficult to attain. Goals influence what happens, where people end up and how satisfied they are.

Labelling

. Identification of judgment errors is a diagnostic task, which requires a precise vocabulary, ie like the naming of the disease in medicine. This labeling, such as

"...anchoring affects, narrow framing, excessive coherence, etc brings together in memory everything we know about a bias, its causes, its effects, and what can be done about it..."

Daniel Kahneman 2012

Judgment Under Uncertainty

Decision-making

. Most decisions are based on beliefs concerning the likelihood of uncertain events occurring, eg future value of the dollar, the outcome of an election, etc. Sometimes these beliefs concerning uncertain events are expressed in numerical form as odds or subjective probabilities. How is this done, ie assessing the probability of an uncertain event? Usually people rely on a limited number of principles to reduce the complex task of assessing probabilities and predicting values to mental operations. Unfortunately, this can lead to severe and systematic errors as it is based on subjective assessment, data with limited validity which is processed according to the heuristic rules, eg the reliance on clarity to determine distance is a common bias. When visibility is good and the object is seen clearly, it is thought to be closer than when visibility is poor and the object harder to see.

. Gossip

"...There is a direct link from more precise gossip at the water cooler to better decisions. Decision-makers are sometimes better able to imagine the voices of present gossipers and future critics than to hear the hesitant voice of their own doubts. They will make better choices when they trust their critics to be sophisticated and fair, and when they expect their decision to be judged by how it was made, not only by how it turned out..."

Daniel Kahneman 2012

Six heuristics re probability assessment under uncertainty/risk

i) representativeness or similarity or stereotyping (an area of concern is "insensitivity to prior probability of outcomes", ie one of the factors that has no effect on representativeness but has a major effect on probability is prior probability, or base rate frequency of outcome. When specific evidence is given, prior probabilities are properly utilised; when worthless evidence is given, prior probabilities are ignored)

ii) insensitivity to sample size (when selecting a sample it should be representative of the population under study; this does not depend on the size sample, ie it is independent of sample size. On the other hand, the smaller sample size has a greater chance of having a larger variation than a large sample size

"...Intuitive judgments are dominated by sample proportion and are essentially unaffected by the size of the sample, which plays a critical role in the determination of the actual posterior odds. In addition, intuitive estimates of posterior odds are far less extreme than the correct values. The underestimation of the impact of evidence has been observed repeatedly in problems of this type. It is labeled conservatism..."

Daniel Kahneman 2012)

iii) misconceptions of chance (it is expected that a sequence of events generated by random process will represent the essential characteristics of that process even when the sequence is short.)

"...A locally representative sequence, however, deviates systematically from chance expectation: it contains too many alterations and too few runs..."

Daniel Kahneman 2012

At times, too much faith is placed in the results of small samples and people grossly over-estimate the replicability of such results. This bias leads to the selection of samples of inadequate size and to over-interpretation of findings.

Another consequence of the belief in local representativeness is a well-known gambler's fallacy, ie after a run of heads in a coin toss activity, people expect an increasing chance of tails to restore the equilibrium. Yet the results of each coin toss are independent of past results and at any deviation are not necessarily corrected.)

iv) insensitivity to predictability (many predictions are insensitive to the reliability of the evidence and to the expected accuracy of the prediction; this violates the normative statistical theory in which the extremes and range of predictions are controlled by considerations of predictability; in general, the higher the predictability, the wider the range of predicted values)

v) illusion of validity (a good fit between the predictable outcome and the input information, ie

"...People predict by selecting the outcome (for example, an occupation) that is most representative of the input (for example, the description of a person)......their prediction depends primarily on the degree of representativeness (that is, the quality of the match between selected outcome and the input) with little or no regard for the factors that limit predictive accuracy. Plus, people expressed great confidence in the prediction that a person is a librarian and given a description of his personality which matches the stereotype of librarians, even if the description is scanty, unreliable or outdated..."

Daniel Kahneman 2012

This can apply to selection interviews

"...The internal consistency of a pattern of inputs is a major determinant of one's confidence in predictions based on these inputs......Highly consistent patterns are often the most observed in the input variables..."

Daniel Kahneman 2012)

vi) misconceptions of regressions (regression towards the mean; this leads to over-estimating the effectiveness of punishment and the under-estimating the effectiveness of reward ‐ see earlier)

Bias

Availability

. Availability (assessing the frequency of a class or the probability of an event by the ease with which instances or occurrences can be brought to mind; it is judgmental; it is affected by factors other than frequency and probability, such as

i) bias is due to be retrievability of instances (a group whose instances are easily retrieved will appear more numerous than a class of equal frequencies whose instances are less retrievable)

ii) salience (the more visual an event, the greater the impact; recent events are likely to be more readily available than earlier appearances

iii) biases due to effectiveness of a search set (different tasks elicit different search sets, eg comparing the frequency of abstract words (thought, love, etc) and concrete words (door, water, etc) -in written English, we think of context)

iv) biases of imaginability (when assessing the frequency of a class whose instances are not stored in the memory but can be generated according to a given rule; generally one generates several instances and evaluates frequency or probability by the ease with which the relevant instances can be constructed - but this does not necessarily reflect actual frequency or likelihood)

v) illusory correlation (bias that occurs in the judgment of the frequency with which two events co-occur; tend to markedly overestimate; extremely resistant to contradictory data; the importance of the strength of the associative bond between the events, ie if it is strong, it is concluded that the events are frequently paired)

Bias in the evaluation of conjunctive and disjunctive events

There are 3 types of events

i) simple events, eg taking marbles from a bag with equal numbers of red and white marbles (elementary event)

ii) conjunctive events, eg developing a new product that involves planning a series of events occurring (people tend to overestimate the probability of these events, ie anchoring - see earlier; overall probability of this event is lower than the probability of a simple event; the more events acquired, the lower the probability of success)

iii) disjunctive events like in the evaluation of risk (people tend to underestimate the probability of these events, ie anchoring - see earlier; the overall probability of this event is higher than the probability of each elementary event; even though the chance of failure of each individual event is low, the probability of an overall failure can be high, eg nuclear reactor)

. Anchoring in the assessment of subjective probability distribution

"...In decision analysis, experts are often required to express their beliefs about a quantity, such as the value of the Dow Jones average on a particular day, in the form of the probability distribution. Such a distribution is usually constructed by asking the person to select values of the quantity that correspond to specific percentiles of this subjective probability distribution...... subjects state overly narrow confidence intervals which reflect more certainly than is justified by their knowledge about the assessed quantities. This bias is common to naive and to sophisticated subjects and it is not eliminated by introducing proper scoring rules which provide incentives for external calibration. This effect is attributable, in part at least, to anchoring..."

Daniel Kahneman 2012

. Judgmental heuristics (cognitive biases)

"...These biases are not attributed to motivational effects such as wishful thinking or the distortion of judgement by payoffs and penalties..."

Daniel Kahneman 2012

. The same biases occur in both laypeople and professionals, ie tendency to predict the outcome which represents what they want

 

Free
5 5 1 Product

1 Month

Start your Change Management Plan today

With our FREE Basic membership


FREE fast start guides to review your organizations

FREE access to change management knowledge base

FREE change management case review

 

JOIN NOW


Become a Member - the benefits:

  • Ability to download a hardcopy(s) of the entire 5 x volume knowledgebase
  • Copy, paste and print content of interest
  • Be personally notified about regular content updates
  • Receive advance copies of the newsletters (including interesting articles)
  • Receive notification of upcoming events like Change Management Masterclasses

designed by: bluetinweb

Free 1:1 Consultation

get a free 1:1 consultation to apply
the relevant concepts to your specific
change management project