29 October 2010

Decision making paralysis - how it happens and how to avoid

In 1954 an economist called L. J. Savage described a principle of human decision making that he called the “sure-thing principle”. He illustrated the sure-thing principle as follows: a businessman is looking to buy a piece of land. There is an election coming soon and he believes that its outcome could be relevant to the attractiveness of the purchase. So to clarify what he is going to do, he thinks through both scenarios: if Republican wins, I will buy the land. If the Democrats win, he also decides to buy the land. Seeing that in both scenarios he would benefit from the purchase, he goes there and buy the land anyway before the elections. Sounds pretty much obvious and few would actually fuss around with that logic – but two psychologists did fuss with it, and what they discovered is that people can take rather irrational decisions when there is uncertainty or too much complexity.

Amos Tversky and Eldar Shafir published a paper proving that the “sure-thing principle” was not always so sure thing. They uncovered situations where the mere existence of uncertainty made people take decisions in a different way – even though the uncertainty was irrelevant to the outcome, like in the businessman land purchase.

Imagine the following situation: you have been studying hard as hell to pass a final exam, which you just completed (a few weeks before the Christmas holidays). You have been studying for weeks for this damn exam, and it is finally over! You have to wait for 2 days to get the exam results back. Meanwhile, you see the opportunity to buy a vacation package to Hawaii at a real bargain price. Here are your three options: a) you can buy it today, b) you can pass it today) or c) you can pay 5 dollars to lock the price for 2 days, which would allow you yo make your decision after you got the grade. What would you do?

You may want to check the result of the exam before (as most of the participants in the research did). Then the 2 psychologists removed the exam uncertainty for other 2 groups of participants: one group was told they passed the exam, the other group was told they failed the exam. The ones told they passed, 57% chose to buy the trip (it is a nice celebration) and the ones who failed, 54% chose to go to the trip (it’s good to recuperate from all the stress). The key take-away: both who passed and failed wanted to go to Hawaii.

Now the twist: the ones, like you, that didn’t know how they did in the exam, 67% of them chose to pay 5 dollars to lock the price and wait for 2 days. Wait a minute, if you pass you go to Hawaii, if you don’t pass you go to Hawaii, but if you don’t know… you wait and see (!?) That’s really not like the “sure-thing principle” should work, eh? It is exactly like if the businessman would have waited to see the results of the election, even though he wanted to buy the land if any of the candidates would win.

This shows that uncertainty, even when irrelevant, can paralyze us in a way to not make a decision.

Another proved decision making paralysis when you have too much choice. In another research, a group of students were faced with 2 choices: a) attend a lecture by an author you admire and who is visiting your university just this afternoon, or b) go to the library to study.

Studying looks like a bad idea, compared to the author, so only 21% of the people actually chose to go to the library. But, would the results differ if you would add a third choice: c) watch a foreign movie that you have been wanting to see? Guess what, with the 3 choices, than 40% of the students decide to… go the library (that’s double the first amount). So, giving the students 2 good alternatives to studying, bizarrely, makes it less likely that they would chose either. So much for rational human beings.

How to avoid decision making paralysis in business (besides, of course, to have less options and no uncertainty)?

Prioritization. I know that is abstract and in theory is easy: you get what is critical and prioritize it over what is nice. But quoting Yogi Berra: “in theory, theory and practice are the same. In practice, they are not”. And that is where the business strategy has to be an sticky message, striped to its CORE and that enables employees to act upon it. Read “With more freedom to take own decisions, the ground level will follow orders better (?)” on strategy messages that enable employees to act.

But one example about messages that enable people to act: Ryanair, I don’t know anything about their messages, but I imagine that they want simply to be the lowest cost airline ever or something. So imagine they made a survey with their customers that revealed that customers would like a free snack in each flight. Then the top executives look at the survey and they have a decision to make: should we listen to our customers and put the free snack or not? It is quite easy to get lost in the “customer is always right” and bla bla bla, but in the end, will giving a free snack make Ryanair be the lowest cost airline ever? No. So the decision is simple: ignore the customer, no free snack.

Decision making paralysis also appears on Made to Stick , an outstanding book about building messages that stick to people’s brains.

No comments:

Post a Comment

Note: Only a member of this blog may post a comment.