Posts Tagged ‘decision making’

When playing poker, there is a term called a bad beat. This is where you do the right thing, and lose anyway. That is poker, there is always an element of chance to it.

For example, the flop comes down and would you look at that, you have hit an ace-high flush. There is nothing else on the board: you know you are holding the best hand here by far. So you bet big. Your opponent keeps calling you.

The turn arrives. It’s a deuce. That is going to do nothing or them. So you continue to bet, but he calls you again. Finally the river: another deuce. Your opponent must be bluffing you think to yourself as you shove all your chips into the middle of the table. They call you, and turn over a pair of twos. Four of a kind beats your flush, and you go home empty handed.

What did our poker player do incorrectly? Nothing! The odds of something being a) stupid enough to call you when there is a good chance you have a flush and all they have is a pair of twos and b) being lucky enough to hit the exact two cards they need in a row are incredibly small. It is a bad beat because you deserve to win the hand.

So what do you do about it?

Nothing. You keep playing how you are playing. Why? Because statistically you are going to win more than you are going to lose. Poker is a game of chance, so if you can tip the odds in your favour it does not matter that sometimes you will take a bad beat. In the long run, you will come out on top if you keep making the right decisions.

What about when I am not playing poker?

It occurs to me that the same thing happens all the time in real life. Often, we can do the right thing, and still get punished for it. It is a bad beat in life. But the same rules of poker still apply to everyday life as well. If we keep making the correct decision, statistically we are going to come out on top.

You are not always going to win at life each day. However, if you can tip the odds in your favour consistently, you can win at life in the long term.

Give me several examples

Once of the best comes from Daniel Kahneman’s Thinking, Fast and Slow. He talks about product warranties. These are profit-making schemes for the companies: they would not offer them if they did not generate money for them.

However, people tend to take them out because they think it is better to insure the risk, or that they will be upset if they have to shell out for a replacement. This may be true, but what is most profitable overall? Sure, if you just have one product warranty, that you turn down, and your electrical item breaks, you are out of pocket.

But each one of us is going to buy hundreds, maybe even thousands, of electrical items over the course of our lives. If we take out extended warranties on all of them, over the long term we are going to be significantly more out of pocket than we would be if we just stumped up to fix a broken product every once in a while.

Example two: automating and passing on a task. If you have a repetitive task that drains your time in short buy annoying chunks you could automate it with a computer, or you could train someone else to do it. Both of these options come with a high setup cost (it takes time to write the computer programme or train the other person) but reduce the amount of time you have to spend on the problem in the long term.

Example three: investing in yourself. How often do you go on training courses that you pay for out of your own pocket? If you are like me, not enough. Yet what if that training course would lead to higher earnings in the long term? Or more time? Or the ability to acquire a much-desired skill? Often this is the case.

How do we apply this to real life?

Winning in the real world requires some luck. However, we can tip that luck in our favour by making sure the decisions we make are Smart Decisions. We will not always win, but by tipping the odds in our favour, we can come out on top on the long term.

How do we do this?

• Consider the overall implications of your decision, not just the short term
• Challenge yourself to resist automatically taking the path of least resistance
• Understand that we have psychological biases to taking the easy route, even though it may not be in our own interest
• When you take a bad beat, recognise it as a bad beat, and not a bad decision

Follow these principles and I guarantee you will will die a richer, happier, more satisfied person. If not, email me after that time for a full refund.

Nudge: Improving Decisions About Health, Wealth and Happiness is a 2008 book by Richard H. Thaler and Cass R. Sunstein. It looks at choice architecture (that is to say how you present people with choices) and advocates libertarian paternalism in public policy, and beyond.

Libertarian paternalism is the idea that we should let people do what they want, but nudge them in the right direction. The current phasing in of enrolment in private pension schemes is a great example of this. People can opt-out if they wish, but if they no nothing, then a sensible default course is chosen for them, in this case to have a pension.

Another good example of this is organ donation. Should you have an opt-in or opt-out system? Both are libertarian by nature in that they let people choose what they want to do. However, most people do not bother to choose, regardless of whether the default is to donate their organs or not. I’ve blogged about this before.

It begins with a revision lesson on Thinking, Fast and Slow. Anchoring is a real problem for example. You will tend to fill your plate at dinner time, so if you want to eat less and lose weight – use smaller plates.

The book notes that people are human, rather than “econs”. Econs being a term of perfectly rational beings. So there is often a struggle between the planner and the doer in you. Your planner will set the alarm for 7am, but when it comes down to it, you just hit the snooze button.

For this reason, Elina now has an app on her phone that donates to charity every time she hits snooze. As it happens she never hits snooze anyway, but if she did, studies have shown that this small financial incentive would be likely to have a powerful effect.

Once you accept people are not econs, things make a lot more sense. I love credit cards. There are loads of advantages to them. However, I pay the full balance of every month. If you know you do not have enough self-control to do that, seemingly irrational actions like avoiding having one suddenly makes a lot more sense.

There is also the problem that the free market does not always function correctly. It works well for soft drinks. We all drink them regularly, so can tell what is a good product, easily compare them, and choose the best ones. But how about mortgage advisors? We may not see the effects for decades, and we only buy one or two throughout our lifetime so the opportunity for learning is not there. The same is true for healthcare decisions. Also, as we are not expects, that adds an extra layer of difficulty to making sensible decisions.

Because we are human, and have these struggles, the book suggests we should nudge people into doing the most sensible thing, while ultimately giving them the choice to change it if they so wish. Hence an opt-out system for organ donation. By default, people will donate the organs, and the overwhelming majority will leave it at this, while still allowing people to change this if they want to be a completely morally bankrupt dick.

Some of the nudges you can use are incredibly trivial and effective. One of the most amusing being that if you put a fake fly in a urinal, men will aim at it. In fact, they aim so well that it reduces inaccuracy by around 80%.

There are some related topics the book touches on. Stimulus-response compatibility for example. People expect things to be certain way. For example, if you put a handle on a push door, people will pull it. Even if you write pull on it. You could argue it is still there fault, but the human brain is geared up to pull things with handles. Just design a better door.

There are a number of social factors that influence people’s actions too. Priming for example. If you ask people what to do before they do it, they are more likely to actually do it. Though as Matt Cutts notes, if you go out and tell people your goals, that actually makes you less likely to complete them.

People often tend to follow others too – if you tell people the percentage of people that are compliant with their tax returns (which is very high), people are more likely to be honest. This fits with what Michael Shermer argues in that people will only follow society’s rules if they see everyone else is following them too.

Company stock options for employees. These are a terrible idea. I invest in the stock market, but I try to diversify my risk as much as possible. Not only do I use index funds that invest in a broad range of companies, but I invest in a diverse range of these – UK, North America, Europe and the developing world. Yet with company stock options, you don’t just have all your savings in one market – you have them in one company! That is super risky, and if the company goes bust, you lose both your savings and your job. Of course many companies offer incentives to invest, but according to the book, these are only worth 50% of their share price when evaluated – so the incentive better be good or you would be better investing it in the wider stock market.

Thinking, Fast and Slow convinced me that taking our extended warranties and phone insurance was never worth it. I never did anyway, but I always wondered whether I should. Nudge points out this applies to a whole host of other things too: insurance when posting items, a smaller excess on your car insurance or damage waiver on your rental car. They offer these policies because they make money, so if you can stomach the short term loses, avoiding them brings long-term gains.

The book concludes with some ideas for society to consider. One is the privatisation of marriage. They argue that the state could get out of the marriage business and leave it to churches, humanists, etc or even your local diving club to do marriages. They could then be as discriminatory or weird as they wanted. However, they would confer no recognition or benefits from the state. Similarly, the state could recognise civil unions, which were independent of marriage, but allow the state to recognise your relationship.

They also address concerns about the misuse of nudging. Of course, this already happens – the supermarkets do not select which products are at eye level at random. However, the book suggests that a good guideline would be that all nudges should be made public. Auto-enrolment in pensions, for example, is no secret, and has an opt-out, so it is difficult to argue it is anything but beneficial. Employing such a strategy means that the least well-informed people in society are protected while offering the most well informed as much choice as they would like.

I recently read Noreena Hertz’s book “Eyes Wide Open: How to Make Smart Decisions in a Confusing World”. It’s quite a good read. In the book she puts forward some of the problems with decision making in the modern world and how can improve our own thinking.

I have picked out some of my favourite quotes and ideas.

“We need to be better decision makers, have decision making classes in schools”

This I would totally agree with. If people had a better understanding of decision making, scientific analysis and understanding statistics and information you would hope that we would at least some of the time have better decisions making, even if that doesn’t fix political bias.

However, I think some of the picture of the “modern world” being such a problem is unjustified.

“The average copy of the New York Times contains more information than you would have encountered 300 years ago.”

That I would suggest is nonsense. How do you measure information? I am sure the New York Times contains a lots of facts and figures, but if you think about the amount of information you pick up just by living your life, its a lot.

Take cooking for example. There is so much knowledge in preparing ingredients, putting it all together and cooking it, serving it, tasting it – tasting food alone has to be a huge amount of information. The human brain can store loads of information.

She probably means specific information in a context. However, it struck me as an add thing to say. She then goes on to say that this is a lot given we can only hold seven things in our memory. Though the latest research indicates this is only two or three things anyway.

“Our world is increasingly unstable and we cannot rely upon it anymore.”

Again, this to me seems like nonsense. Our world is the most stable it has ever been. On a global level, less people are being killed by war than ever before. However, it is on a personal level were we really have seen the chance.

Hundreds of years ago, if the crops failed, you were fucked. Totally fucked. There was a good chance you would die. Just ask the Irish. Today I can walk into Tesco and buy food 24 hours a day, 7 days a week. It will always be there. There is no time when Tesco do not have food.

So who cares if Leman Brothers might collapse overnight. I will still be able to find food, clean water, shelter and medical care tomorrow, and the day after, and the day after that.

In short, I think she paints a much bleaker picture than we actually find the world. However, there is plenty of room for improvement. Luckily there were some buzz words to the rescue – lets go about making some empowered decision making.

Intuitive thinking

One of the first things that I liked was that She then says that intuitive thinking is often wrong, in contradiction to Gladwell. She even says something like you can’t just blink and make a good decision. Perhaps as an intention reference to the nonsense Gladwell wrote in his book entitled “Blink”, or perhaps not.

Social media

Hurtz puts forward the idea that the constant ping of emails, phone calls and other distractions utterly ruins our train of thought. “Social media is distracting.” I have not seen the research on this, but it would be interesting to know if this is also true of the younger generation who have grown up with it.

Cult of the measurable

Hurtz laments the rejection of anything that cannot be measured. SHe claims that domestic violence is ignored because it is hard to measure. This is a big claim, so I would like to see some evidence on that before I believe it. Of course it could be the case, and if it is, that is something we should address.

Measurables are important though. Maybe not with wine, the example Hurtz uses, but they are with most things. How do you measure success without measurables? How do you make an evidence-based decision if you cannot measure the evidence? It provides the justification for your decisions.

Positivity bias

Most people have a positive bias. Ironically, it is depressed people see the world most clearly. Everyone else overlooks the negative stuff. This should be taken into account when making decisions. You should re-adjust your perceptions in case bad things happen.

I discussed this idea with my friends and family. They said, in my case, I was probably adjusting far too much already lol.

Recency bias

I am not sure what the actual name of it is. However, Hurtz tells the story of an ER doctor that had seen a lot of pneumonia cases recently. A patient came in with slightly odd symptoms that did not quite fit. However, the doctor diagnosed it as pneumonia. Another doctor, who had not seen all the cases, immediately correctly the diagnosis to aspirin poisoning.

This is something I could definitely do to be more aware of at work. Often I will be trying to trace down a bug, as it is the same thing I have seen before, but the usual fixes and debugging are getting me nowhere. Usually, it will turn out to be something totally different, but because I am zoned in on a particular problem, I miss it.

Challenger in Chief

Hurtz recommends you appoint someone to pay “Challenger in Chief”. Their job is to challenge your ideas in an attempt to overcome your optimism bias. They can play Devil’s Advocate and put your ideas to the test.

Pick your historical lessons carefully

Do not get hung up on past success and failures. Richard Zanuck, one of the producers of the Sound of Music, went on to commission several more musicals after the huge success of the first. They flopped. History is not always a good indicator.

This correlates with what Duncan J Watts writes. History only happens once, so is a sample size of one. His classic example is the Minidisk. Sony, hurt from losing the VHS Betamax wars, really did learn its lessons and make an excellent product in the Minidisk. But it still flopped, because of the entirely unpredictable rise of file sharing making MP3 devices popular. Do learn from your mistakes. But do not learn too much.

Thinking time

According to Eyes Wide Open, Barack Obama advised David Cameron to allocate large parts of his day to time where he does nothing but sits and thinks.

I cannot find any evidence to support the claim made in the book, but it is good advice anyway. At work, sometimes I just sit and think. That time is an investment, allowing me to work out the pros and cons of my ideas before I implement them, thus saving time in the long run.

It is also a good idea to not implement ideas straight away. When you first come up with an idea your a) probably quite excited about it and b) have not had time to think it through. Put it at the back of your mind and mull it over for a while before doing anything.

This is something I already practice at work and home. If I decided to take on a new project or get involved with a new charity, I will wait a few weeks and see if I am still as excited about it as I was when I first thought of the idea. Only after sustained interest in an idea will I pursue it.

Similarly, at work, if we need a new feature implementing, I will generally leave it to the next day so that my mind has time to process the pros and cons of my approach.

CV writing

Studies on CVs that suggest if you write it in the third person it is taken more seriously. So the next time you are updating your CV, replace “I lead a team and I implemented x” to “Leading a time and implementing x”.

Anchoring

Anchoring is a real problem, and something Kahneman writes a lot about in Thinking, Fast and Slow. If you are not familiar with the problem it is this. If you ask someone who much a house is worth, they will probably give you a reasonable estimate. However, if you tell them the house recently sold for a huge amount, they will subconsciously anchor on this, and give you a much higher estimate.

This is not always a problem, but is a massive problem when it comes to things like sentencing a convicted criminal to x number of years in prison. It is also one of the reasons why you can get a much better pay rise by switching companies.

Once you are aware of these potential anchors and biases, you can try and eliminate them. Hurtz recommends painting a blank canvas. If you are looking round a new house for example, and the current owner has baked some fresh bread to bias your senses, take the time to try and imagine it without it without the smell.

Colours affect our judgement. This is something we saw a lot at Sky Bet. Just changing the colour of a button for example could have a significant impact on whether people clicked it or not.

Narrowcasting

Do not be so hasty to block people with different opinions on Facebook and Twitter. It is important to expose yourself to different points of view, otherwise you find yourself in a bubble where all you ever get is people reinforcing your existing opinions, regardless of their validity.

I have Facebook friends who post material from the far left, and occasionally from the right. I have religious friends and foreign friends with cultural differences, and many of their opinions I do not agree with. However, I am glad they share them with me to challenge my own point of view.

Eli Pariser also has a great TED talk about this.

Summary

While I think the introductory chapter perhaps over-emphasises the problems with modern society, this book is filled with good ideas. Of course, I would think that as I already use a lot of them, but there was plenty of useful reminders and new ideas that for me, made this book an excellent read.

Daniel Kahneman is a psychologist who won the 2002 Nobel Prize in Economics. His book “Thinking, Fast and Slow” summarises a lot of the research he has done and proves to be a fascinating reading.

As someone who isn’t a psychologist I found some of it heavy going, but very interesting. The book is arranged into sections and these are then broken down into short chapters, which made it more readable.

Some of it was shocking too. For example, when it comes to making parol decisions, one of the biggest factors is how recently the parol office has eaten! Just after a meal they are far likely to grand you parol than just before a meal.

His discussion on priming reminded me a lot of what Richard Wiseman talks about in his book Rip It Up. Behaviour can drive emotion, even though we always think of it as emotion that drives behaviour.

The question of how effective pure branding advertising is gains some support. “Familiarity is not easy to distinguish from truth”. The more you show something to people the more confident they feel about it. Other times a lack of clarity is helpful. For example, using a bad font makes exam scores go up, because people have to concentrate more than they normally would and so make less mistakes.

Much of the book discusses the differences between System 1 (that does the fast thinking) and System 2 (that does the slower, more considered thinking). Elina often reproaches me for not noticing snails on the path, suggesting that I need to notice things or one day I will be eaten by a lion (metaphorically, these days). I now maintain that my System 1 is keeping an eye on things and simply not bothering to engage my System 2 because there is no danger.

Kahneman also adds weight o Burton Malkiel’s book A Random Walk Down Wall Street, which both discuss how the stock market is almost entirely unpredictable and therefore stock market traders actually add no value to what they do. Indeed, as 60% of mutual funds do worse-than-guessing, they actually subtract value.

Ultimately, people are just really bad at making judgements. 90% of drivers rate themselves as above average. Similarly, the majority of new businesses fail, yet the people who start them almost always believe they are exempt from such rules.

The answer to many of these issues is to replace judgement with a formula. This is essentially the entire point of Michael Lewis’s book Moneyball. Even a simple formula will do, according to Kahneman multiple regression does not even make it much more accurate.

One of the most useful points I took away from the book (almost certainly not the objectively most useful) is the idea of taking small gambles. In one chapter, Kahneman describes how people are unwilling to take profitable one-off gambles, such as a 50/50 chance of winning £20 or losing £10, but would be willing to take it if they knew they could take it 100 times in a row. The larger sample size means they are very likely to come out on top. However, they fear doing it once because there is a 50% chance they will lose and that will go down in their mental accounting.

Kahneman makes the point that we are “not on our death bed” and thus we will get chance to get even with the universe over time. Extended warranties are a great example of this. You pay a premium to insure your products, so it costs you money in the long term. A better strategy is not to buy the warranty and accept that sometimes you are going to have to replace a product – but over your lifetime you will almost certainly be up.