Behavioral Economics & Day to Day Life/ Organizational Tasks

Understanding and appreciating Behavioral Economics fundamentals (for example, Herbert Simon’s “bounded rationality” or Tversky, Kahneman’s “Prospect Theory”) and how they may apply to day to day life/ organizational tasks, is not always easy.

Towards the objective of helping appreciate linkages between various Behavioral Economics concepts and how the same can be leveraged for improving day to day life, I’ve put together a modest document.

The document has three sections (see attached Word Doc file – Behavioral Economics and Day to Day Organizational Life):

• Section I – Bounded Rationality & Individual Decision Making
• Section II – Bounded Rationality & Group Decision Making
• Section III – Bounded Rationality & Common Biases/ Heuristics

I have cited sources wherever possible but do excuse if I may have missed out any references. Please do feel free to add any examples that you may be aware of in the Comments section. It would only further help in demystifying and appreciating the day to day implications of something (i.e Behavioral Economics) seemingly perceived as so esoteric and complex.

Emotions & Behavioral Economics

The Case for Human Collaboration! The Case for the Crowd!

I have recently been reading quite a bit about the limits of human cognitive capabilities (works of Herbert Simon et al; most recently Nassim Nicholas Taleb in “The Black Swan”).

Many of these experts highlight how our brains are not geared to deal with huge quantum of data and computation of complex probabilities. And that there is only so much “rationality” that we are capable of (Herbert Simon’s concept of “bounded rationality”). This is further aggravated by the assertion by thought leaders like Friedrich Hayek that “we don’t know what we don’t know”.

Moreover, beyond a certain point (especially in times of ambiguity, uncertainty, stress and conflict) our brains are wont to fall back on limbic/ primal mechanisms of choice and decision making. Irrationality and Emotions rush in to fill the vacuum created by vague/ ambiguous scenarios.

To this already untenable quandary, add the fact that the communities we live in are quite uncomfortable with scepticism and “I don’t know” as a legitimate response by a single individual to some of life’s complex situations.

Certainty is granted premium.  And equated with confidence (notwithstanding how the “certainty” may be ill founded, simplistic, incomplete). Moreover, most incentive systems are geared towards rewarding those who sound certain/ confident/ sure.

All of this has clear implications for our individual choice and decision making capabilities.

If the individual human brain already has inherent limitations and is further overwhelmed with the quantum of data/ information that one is inundated in today’s age of high speed Internet, Social Media and Big Data – what solutions could one look at to reduce the overwhelming load and stress on the solo, individual human brain?

Technology of course is one answer. Analytics based solutions which help in sense-making/ meaning-making out of tons of data. And of course the ever increasing computing power and a battery of mobile apps at our finger tips.

But beyond technology’s aseptic intervention, there is another powerful, deeply ingrained human quality that we can bank upon at times of distress and overwhelming pressures of choice and decision making.

(Wo) Man is a social animal, we are told. We continue to be increasingly more “social” thanks to new media and technologies (though this can be argued against. Social media is, of course, not devoid of its dysfunctionalities).

If the various problems that plague our current generation are way too complex and interdependent to be handled by single individuals, single nations, single entities (take the problem of saving the environment for future generations, as an example), then there is a clear case for crowd-led interventions and inter-disciplinary collaboration to solving many of these intransigent problems.

While this is just a seed of an idea at this juncture (and not too original or novel a concept! :-)) and just an initial proposition that I have developed, I intend to delve deeper into this “solution” of Collaboration. And how this very human quality can be used to facilitate decision/ choice making under conditions of ambiguity/ uncertainty.

In the interim, please feel free to add your thoughts on “Collaboration”. Have you ever experienced the “wisdom of the crowd”? What are your views/ thoughts on “social/ collaborative/ inter-disciplinary” solutions to complex, intractable human problems? Would love to read your thoughts. Do write in!

Note:  At the same time, paradoxically one continues to have immense belief in the “Power of One” and how each one of us as an individual can make a difference (despite our real/ apparent limitations). Also while one values Diversity and Collaboration of a team, one has an equal discomfort with herd/ mob mentality.

 

 

 

(Don’t) Judge a Book By Its Cover

First Impressions…. can be helpful. But can be misleading as well!

Ben Ambridge

We all know that you shouldn’t judge a book by its cover. But we all do it anyway. If I were to show you some faces, you’d find it pretty easy to make a snap judgment of –say – how clever they look. But this would just be prejudice, right? You couldn’t, just by looking, guess people’s actual intelligence. Could you?

Let’s try. Below are three men. Rank them in order of intelligence from most to least (these aren’t real people, but composites created – in each case – by averaging across lots of difference faces).

 And now the same for women.

Scroll down to find out the rankings that most people give.

Photo credit: http://colorfully.eu/dont-judge-a-book-by-its-cover-only/#!prettyPhoto-7611/0/

For the male faces, most people rate the man on the right as the most intelligent, and the man on the left as the least. For the female faces, most people rate the woman…

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Nassim Nicholas Taleb – Fooled by Randomness. And Selection Biases!

In “Fooled by Randomness”, Nassim Nicholas Taleb debunks the myth that “experts” truly consider all rational probabilities before making choices. “Experts”, like most of us, are prone to non-probabilistic/ irrational thinking (driven by emotions) and inclined to taking quick and dirty “mental shortcuts”.

The “mental shortcuts” (or cognitive heuristics) are inclined to biases (for example – availability/ familiarity bias – what is the data sample most readily available and taking decisions based on the limited data set rather than considering a much larger and representative data set and making choices based on validated empirical evidence. In extreme cases – this would translate to having a bias for someone from your own country/ region/ city/ campus, etc – those who are more “familiar” than those who are distant/ not familiar).

Of course the value of such quick “decision making” has benefits in the business world in terms of “speed” and “sounding confident” of your data set (and not doubting its limitations based on its “smallness”/ non-representativeness).

However it has implications in terms of Selection errors (think Recruitment in any organization) as Recruiters continue to hire people based on “familiarity” (and many a times in the process hiring clones of themselves).

Organizational/ Cognitive Diversity in the process can be at risk. You have people who speak the same “language” (not necessarily same native tongues but same world views/ same thought processes), which leads to limited perspectives and hence limited ways of solving complex organizational problems.

Of course, if the organization has a clearly defined “Value System/ Culture” and are clear about the kind of “mental/ cognitive/ behavioral” make up they are looking for (including a clear appreciation for Diversity and how it helps creative problem solving and Innovation) and have objective tools/ trained Recruiters for gauging the same (which usually is asking for too much!), then the upside is that you would hire people who are “aligned” to the organization’s articulated “Value System/ Culture”.

In the absence of the above mentioned clear articulation and/ or established objective assessment process to gauge empirical validity of choices, familiarity will continue to be the culprit in Selection Biases. And the victim in the bargain would be Organizational/ Cognitive Diversity.

And, in turn, the Organization’s ability to “Think Different” and deliver Innovation to their Customers.