Great decision-making and how confidence changes the game

Updated: 2 days ago



Article summary: We discuss why "confidence" is the critical decision emotion. Confidence is important to either personal or business success. We provide tools and resources to help you achieve "conviction in your confidence." Ultimately, the best decisions and successful decision implementations are outcomes signaled, encouraged, and empowered by confidence.


Table of contents:

  1. The origins of confidence

  2. Decision-making best practices

  3. Choice Architecture solutions

  4. Notes

 

1. The origins of confidence


People are emotional. Dr. Jill Bolte Taylor is a Harvard University-trained neuroanatomist and the stroke-surviving author of My Stroke Of Insight. Dr. Jill said:

"Most of us think of ourselves as thinking creatures that feel, but we are actually feeling creatures that think."

This suggests our brains process sensory information and utilize "fast" emotion-based cognitive processes in advance of using "slow" and more logic-seeking cognitive processes. This has to do with human evolutionary biology, as unfolded over a half million years of human development. Our brains adapted to best survive our environment over this time. Until most recent human history, it turns out that "thinking fast" was the only way to survive long enough to have children and pass on our genetic information. [i] This is the basis for “natural selection” as brought to us by Charles Darwin. [ii] The reference to fast and slow brain processes is attributed to Nobel prize-winning behavioral psychologist Daniel Kahneman. [iii] Dr. Kahneman is widely considered the founder of behavioral economics.


Our "emotion-first" brain processing state is a necessary byproduct of human evolution. It also creates in-the-moment decision challenges. Our fast brains are more likely to take mental shortcuts that create significant and predictable biases. Also, it has been shown that even when the opportunity is provided to think slower, we sometimes still rely upon initial "thinking fast" impressions. To dig deeper, please see the reference for the High Emotion & Low Language case provided in our notes. This model describes the "fast path" our confidence emotion will generally travel. Notice that the sensory information bypasses our slower and more logic-seeking left hemisphere. [iv]


Confidence is an emotion. I call it the "decision emotion" because it provides the emotion-based signal as to whether or not we "feel" we made a good decision. Decision confidence is important. Confidence is an emotion-based signal that informs our decisions and motivates us to productively move forward after a decision is made. Next are two examples:

  • A personal, car buying decision: Car buying is expensive, plus we have many preferences to weigh. Some of those considerations are objective, like: "I need safe transportation for travel to work." Others are more emotion-derived judgments, like: "It feels good to accelerate fast!" There are many car buying alternatives and price points. Confidence is when we feel good about the decision to buy a particular car. Confidence will help us negotiate, buy, and then we will feel good about using the car after we purchase it. A confidence-inspiring process minimizes buyer’s remorse.

  • A corporate, new company acquisition decision: New companies are expensive and we worry about cultural fit and need to weigh other criteria. Some of those criteria are objective, like: "I need an ROI greater than xx%." Others are more emotion-derived judgments, like: "I like the CEO of XYZ company, she really gets our strategy!" There are many acquisition candidate alternatives and price points. Confidence is when the decision stakeholders feel good about the optimal decision to buy a particular company. Confidence will help us negotiate, buy, and then our team will feel motivated to integrate the company after we purchase it.

It probably did not escape your attention, other than changing a few words, the process categories common to the car buying experience are not that different than a major corporate M&A decision. Whether personal or corporate, our confidence plays a prominent role in our decisions.


Thus far, we have established that confidence is important in most decisions. Plus we suggest that people are subject to inevitable "fast-brain" biases as woven into the fabric of our biology. These are commonly known as "Cognitive Biases" [v] and they likely impact the reliability of the confidence signal. This is tricky! The operative question then becomes:

"How do we achieve 'conviction in our confidence' when it may include false signals generated by our cognitive biases?!"

This is especially tricky because we are generally unaware when we are under the influence of our own cognitive biases. YIKES!


To dig into this question, let's first explore four key cognitive biases impacting confidence and decision-making. [vi] The "Big 4" decision-making cognitive biases are anchoring bias, representative bias, availability bias, and groupthink.


To understand how these biases interact, it is helpful to consider them as a member of outcome categories. The following graphic shows the decision-impacting causal categories and how they relate to cognitive biases when stepping through a decision process. [vii] All these categories and biases interact. Some are more relevant depending on the situation. Reading from bottom to top, the bottom outcome categories and biases are more common and foundational to all reasoning, whereas the top ones are more specific to the moment a decision is made. The "Big 4" cognitive biases are noted in the dark font.

  • Foundational biases: Start at the foundational category at the bottom of the graphic. The pattern recognition foundation contains the common cognitive biases we all share and has the broadest impact on our reasoning. Within the pattern recognition-based foundation, confirmation bias is the primary cognitive bias.

  • Action-oriented biases: Next up are the action-based cognitive biases. These will either 1) spur an individual to act when one would have been better off tempering their action. This is related to overconfidence. Or 2), on the other hand, they may delay individual action when one would have been better off moving forward. This is related to inertia.

  • Group decision-making biases: Moving up the graphic, we are now at the biases directly impacting the decision. These are either individually impacting us as a participant in a decision or they are more social-related biases—social biases impact group dynamics. Please note, not all decisions are made in a group, so social biases are only related to decisions with multiple stakeholders, such as organizational decisions. Generally, the larger the organization then the higher the potential for social biases impact.

Understanding how these cognitive biases are defined is the first step to recognizing when you or others may be under the influence of a cognitive bias. Next, we define and provide examples of the "Big 4" cognitive biases. Remembering that the Big 4 are found in families of interrelated cognitive biases is helpful as you step through the examples. These definitions also suggest the importance of having a decision process, also known as "choice architecture," as the primary means to mitigate the impact of cognitive biases. We discuss choice architecture in the next section.


Anchoring Bias: This bias is part of the inertia / action-dampening outcome category. We tend to be more confident in the evidence we previously accepted as a decision starting point. Anchoring bias may cause us to not stray far from dubious evidence, even though resetting our decision starting point may be most appropriate. The problem is that we rarely adjust enough.

  • Car sales example: Salespeople use anchoring as a sales tactic all the time. If a salesperson is trying to sell you a particular car, they want you to take a test drive. The test drive may inappropriately anchor you in this particular kind of model or car feature. In effect, the anchor psychologically reduces your alternative set to increase the probability you will buy that salesperson’s car. [viii]

  • Corporate example: In a corporate environment, anchoring bias presents as the “loudest or highest paid voice in the room” inappropriately impacting the decision process. We are particularly sensitive to anchoring bias under time scarcity. [ix] Thus, it is no surprise that when we are busy, we are more likely to rely on the "thinking fast" part of our brain.


Representativeness Bias: This bias is part of the overconfidence / action-spurring outcome category. We tend to be more confident about how likely a decision outcome is based on how similar something else is in a seemingly like category. Think of this bias as substituting an easier question for a harder question. The problem is that the two questions do not render a comparable outcome. This is like the “bait and switch” of cognitive biases. [x]

  • M&A example: In the U.S. many successful businesses are owned by white men. Investors regularly evaluate multiple company alternatives for purchase. This is also known as "Mergers and Acquisitions" or "M&A." A naturally occurring cognitive bias would be if that investor believes there is a higher chance of business success because a particular purchase alternative is owned by a white man. The naturally occurring bias is that the business success probability is inappropriately correlated to the easier-to-answer question. In this example, the historical fact that many white men own businesses is a "fast brain"-based biased criterion. Instead, the appropriate but harder-to-answer multiple success criteria should be evaluated when choosing the best company purchase alternative.


Availability Bias: This bias is part of the individual decision moment outcome category. We tend to be more confident in the things easier to see than the things that are more hazy. We overestimate the frequency of events that are easy to recall. This is also known as salience bias.

  • Climate example: Solving our climate crisis is a great example. Carbon dioxide is an invisible, odorless gas emitted by cars, industrial processes, and just about anything that uses fossil fuels. Our own brains naturally discount this pollution because its effects are not easy to see (I.e., pollution effects are not salient via our “thinking fast” cognition). In the main, scientists agree that the climate crisis is an existential threat to Earth. Yet, all the while, it is challenging to generate policy momentum to resolve climate issues.

  • Student loan example: The college system is also deeply challenged by availability bias. Today, regardless of the cost of a particular college, the U.S. Government supported loan system leverages salience via the student loan system structure. A selective private college may cost over $75,000 per year. A community college may cost less than $10,000 per year. The financial opportunity cost and potential long-term negative wealth impact of the loans needed to fund different educations are massive. The great challenge is, via our naturally occurring availability bias, that students naturally discount or effectively eliminate the perceived cost of education differences between colleges. The differences between these loan options lack salience because the student does not need to start loan repayment until after finishing college. The student perception lacks salience because four years is quite a distance into the "hazy" future. [xi]


Groupthink: This bias is part of the social decision moment outcome category. In a group, we tend to silence our doubts and side with the prevailing beliefs instead of offering a dissenting opinion. This is related to anchoring bias but impacts group dynamics as impacted by our individual action biases. The outcome of groupthink tends to lead to more extreme decisions than the averages of the group. Also, the sequence of speakers affects the outcomes, as downstream private information is withheld and already shared information is emphasized.

  • Corporate board example: Warren Buffett is known as one of the greatest investors of all time. As expected, he is on many corporate boards of Berkshire Hathaway's portfolio companies. At a 2014 Coca-Cola board meeting, as reported by CNBC, Buffett initially indicated he was against a management equity compensation plan that he considered too generous. Buffett was joined by an activist investor that called the stock options "lottery tickets." Given his stature and other support, Buffett could likely go "against the group" as he pleases. However, when it came time for the vote, Buffett decided NOT to vote against the plan, abstaining instead. When asked later about his change of mind and voting with the management group, in characteristic Buffett style, he said: Opposing the stock option plan "is a little like belching at the dinner table. I mean, you can't do it too often. If you do, you find yourself eating in the kitchen pretty soon." Since board votes are known by other board members, later retaliation from others is a concern. Groupthink is a form of social norming. Those that fear retaliation keep quiet to avoid it. [xii]


You may be thinking... “I am smarter than this! I would never allow these cognitive biases to impact me!” The truth is that cognitive biases are very challenging to overcome. Studies show that even with awareness, cognitive biases often still have an impact. In general, cognitive biases are easier to see in other people or after the fact. People generally cannot perceive their own cognitive biases in the moment. Studies also show that “expert bias” may also be a biasing factor with those that you would expect to have unbiased recommendations. Philip Tetlock, in his book Superforecasting, mentions [xiii] :

“And people equate confidence and competence, which makes the forecaster who says something with a middling probability of happening less worthy of respect.”

Decisions such as M&A decisions do not happen often and have many unique features. Unlike frequent and practiced decisions like playing chess or fire fighting, M&A decisions are conducted in a relatively unpredictable environment with little past relevant feedback to guide decision-making. [xiv] Thus, little past experience will guide such decisions. In fact, Olivier Sibony, former McKinsey strategy consultant and Associate Fellow at Oxford University said:

If we searched for a textbook example of conditions in which expert intuition cannot develop, we could not find a better one [than M&A.]

While it is true no acquisition is the same, decision participants do have judgments useful to individual decision criteria or alternatives. High-quality decision processes will both a) minimize cognitive bias impact and b) maximize the valid judgmental signal of decision participants.


Kenneth Svendsen has held CEO, President, and C-suite roles in the global entertainment, sports, and hospitality industries. He has worked with Disney, Hilton, and Entertainment Cruises. His Private Equity experience includes Blackstone, Pritzker Private Capital, and PE Advisory M&A. Mr. Svendsen said:

"People are down on what they are not up on."

Mr. Svendsen provided more context by saying:

"The M&A decision process is critical. It is not just about the 2-4 lead decision-makers! Equally important are the 5-10 leaders supporting the decision process and often owning the integration. They always have other full time jobs. Most important about our decision process is - the more the team knows and embraces the power of 'why,' the more decision-making accelerates and the more people feel invested in our success."

2. Decision-making best practices


Now, let us return to the "conviction in our confidence" question. At this point, we have learned that a) feeling confident is important when implementing any decision and b) there is a chance that a feeling of confidence may be a false signal generated by our cognitive biases. So what do we do?!


The key to making the best decision is being the captain of your own choice architecture! A less than the optimal decision is often a result of being unclear about our preferences. Economists focus on demand and the best price for a good as being a product of our aggregated preferences. Our aggregated preferences are also known as utility. The problem is that understanding our own utility is difficult for many people and is ground zero for our cognitive biases. We are often challenged to clarify “what is important to us” in a way that leads to the best decision. In the business context of multiple decision stakeholders, combining group member preferences to create a valid group utility perspective is both challenging and critical. As suggested earlier, it is our own brain's biology that creates challenges to accurately aggregate our preferences. Psychologist, Economist, and Choice Architecture researcher Barry Schwartz makes an important observation [xv]:

“Learning to choose is hard. Learning to choose well is harder. And learning to choose well in a world of unlimited possibilities is harder still, perhaps too hard.”

At the bottom, we provide links to choice architecture-related processes, tools, and resources that lead to a confidence-inspiring understanding of our own utility. This occurs by revealing our own preferences and leads to making the best decision.


We recognize you have choices when defining your own utility and those choices may evolve over time. As such, the articles referenced in section 3 provide suggestions and examples for defining utility in a way that maximizes your long-term financial wealth or other interests.


Defining your utility is also known as defining and weighing your and all decision stakeholder's criteria. Once the group criteria are clarified, then it needs to be applied to each alternative. This is generally where the heavy lifting begins - like performing due diligence with multiple M&A alternatives, researching different car alternatives, or any other decision. The key is having a process that helps you and your decision team research the alternatives and apply the criteria in a manner resulting in an unbiased and precise decision recommendation.


The end result of a strong decision process provides for Decision A.C.T.:

  • Acceleration – faster, less costly decisions. It enables a nimble decision environment.

  • Confidence – process causes people to be more confident in organizational decisions, increasing buy-in, and decision up-take.

  • Transparency – reporting, documentation, and artifacts to help communicate the decision. Good especially for “second-guessers” like internal audits, boards, or regulators.

Decision-making best practice: When making any significant decision, a decision-making best practice is to design your own decision environment. Initially, this means investing time to specify your buying road map and buying process. Think of this initial investment very much like the proverb:

"A stitch in time, saves nine."

Being your own choice architect is very helpful for achieving the best outcome.


For people: Broadly, most sellers today have their own customer-facing choice architecture. Think of Tesla, Amazon, Netflix, your favorite restaurant, or a company 401k provider. All of them have tools (like websites, smartphone apps, menus, etc) to help you make a decision. The challenge is, and studies show [xvi], that the seller's choice architecture is designed to help them maximize profitability or some other objective. The best choice for the seller does NOT necessarily provide the optimal outcome for you.


For organizations: Most companies have dedicated departments to maintain their own choice architecture for making significant purchase decisions. These decision process departments may be called by different names, such as “Procurement” or “Strategic Sourcing.” If companies are willing to spend millions on purchasing choice architecture, shouldn’t people and related business contexts use choice architecture for their significant decisions?


3. Choice Architecture solutions


The following are resources providing for optimal decisions using tools that enable you to achieve conviction in your confidence! These are solutions to develop your own choice architecture. They are high value and easy to use. For most decisions, they are well worth the time and expense to ensure the best decision and confidence validation. We provide solutions for individual decision-making, enterprise-level group decision-making, and everyone in between. They all share the core capabilities enabling people’s confidence and the best decisions.


Definitive Choice: For individual or small organization groups - This smartphone app provides a convenient way to enter and weigh your preference criteria, then, enter your potential decision alternatives and their costs. Behind the scenes, it uses decision science to apply your tailored preferences and preference weights to score each of your alternatives. Ultimately, it renders a rank-ordered report to help you understand which alternatives will give you the biggest bang for your buck. Using a decision support app will 1) save you time, 2) optimize your economic value achieved, and 3) increase your decision-making confidence!


Next are a few real-life examples of using choice architecture solutions to make the best decision:


Definitive Pro: For corporate and larger organizations - This is an enterprise-level, cloud-based group decision-making platform. Confidence is certainly important in corporate or other professional environments. Most major decisions are done in teams. Group dynamics play a critical role in driving confidence-enabled outcomes for those making the decisions and those responsible for implementing the decisions. Definitive Pro provides a well-structured and configurable choice architecture. This includes integrating and weighing key criteria, overlaying judgment, integrating objective business case and risk information, then providing a means to prioritize and optimize decision recommendations. There are virtually an endless number of uses, just like there are almost an endless number of important decisions. The most popular use cases include M&A, Supplier Risk Management, Technology and strategy portfolio management, and Capital planning.


Next are a few whitepapers and examples of how to make the best organizational decisions:

 

4. Notes


[i] Roser, Ortiz-Ospina, Ritchie, Life Expectancy, Our World in Data, 2019


As an indicator of our reduced need for physical protection as impacting human evolution, in the last 200 years, the world's life expectancy has more than doubled.


[ii] Darwin, The Origin of Species, 1859


[iii] Kahneman, Thinking, Fast and Slow, 2011


[iv] Hulett, Our Brain Model, The Curiosity Vine, 2020


[v] Bias occurs in many contexts. For example, car side-view mirrors provide a safety signal that danger, like another car, maybe close. The mirrors are typically convex to maximize the signal field of vision. However, the convexity creates a visual bias. Many cars are required to have the following safety notice on their side-view mirrors: “Objects in the mirror are closer than they appear.” This is because the convex nature of the mirror makes the actual world appear differently than it really is. The same can be said for cognitive biases. Our brains naturally and predictably create distortion based on how situations are viewed. Unfortunately, our brains do not have a safety notice!

For a deeper dive into "bias" and "noise," along with their close cousins' "accuracy" and "precision," please see:


Hulett, Good decision-making and the nuances of accuracy and precision, The Curiosity Vine, 2022


[vi] Kahneman (Editor), Slovic (Editor), Tversky (Editor), Judgment Under Uncertainty: Heuristics and Biases, 1982


This is a well-researched compendium of decision-impacting cognitive biases.


[vii] The organization of these cognitive biases in outcome categories was inspired by Olivier Sibony via his footnoted book. Also, see the book's appendix 1 for a brief description of all the cognitive biases mentioned in the graphic, besides the "Big 4."


Sibony, You're About To Make A Terrible Mistake, 2020


[viii] For a fun and high-impact example of anchoring bias in action, please see the Will Smith and Margot Robbie movie called Focus. This is a "con man" movie. SPOILER ALERT: The next couple of paragraphs reveal a movie scene.


The exemplar scene is when the Smith character makes a seemingly sure-to-lose bet at a football game with a high-flying tycoon. This scene is super entertaining and the "good guys" win the bet. This occurs by a seemingly outrageous stroke of luck, as the tycoon and the Robbie character both pick the same player's number 55. On its face, if:

  1. each football team has 80 players and

  2. each football team has a similar number set from which to choose,

then the probability baseline of 2 independent and random number pickers selecting the same number would be VERY LOW. [ (1/80)^2 = .02% ] Because the Robbie character is an insider, it is no surprise that she picked “55” since, as part of the movie narrative, she already knew the player. So this raises the baseline to 1/80 or just over a 1% probability that the tycoon would pick “55”. This is still a horrible bet for the Smith character. So how did he win the bet?


This scene is later explained as a prototypical example of anchoring bias and using psychology to greatly improve a random probability baseline. They show how the tycoon was anchored to the number "55" by a series of subtle but effective nudges as the tycoon approached the football stadium and his suite. The tycoon's set of player number alternatives was craftily reduced by a series of well-placed psychological anchors.

To be fair, we can all imagine how this “made for Hollywood” bet could have gone wrong for the Smith character. But it is still a nice example of the impact of psychological anchors in our decision-making.


[ix] Mullainathan, Shafir, Scarcity: Why Having Too Little Means So Much, 2013


[x] Tetlock, Gardner, Superforecasting: The Art and Science of Prediction, 2015


[xi] The advertised promise by the U.S. government is that "Education Pays." The reality is, on average, college turns out to be a poor investment for many Americans. This poor investment is characterized by big loan payments, loan default, a job without enough income to repay the debt, stress, a lack of mobility, and little money for retirement. The lack of salience and overall complexity of the college decision-making process are key contributors to our college system’s challenges.


Next, we provide several well-researched articles clarifying availability bias and related U.S. college system challenges. Plus we provide a path forward to both make the most of the College system as it exists and to transform the college system. Our college transformation vision enables adaptation with the latest teaching research, education technology, and drives price efficiency via the latest consumer platform technology.


Hulett, The College Decision - Framework and tools for investing in your future, The Curiosity Vine, 2021

Hulett, The College Stoic: The Stoic's Arbitrage and making a great college decision, The Curiosity Vine, 2021

Hulett, The Road To Absurdistan: Student lending psychology and bizarre incentives, The Curiosity Vine, 2021

Hulett, The benefits and risks of college – An employer's and risk manager's perspective, The Curiosity Vine, 2022

Hulett, Higher Education Reimagined, The Curiosity Vine, 2020


To assist high school students with challenging college decisions, we launched a nonprofit and provide a smartphone app. The app leverages much of this research.

Definitive Social and the College Xoice app.


[xii] Sibony, You're About To Make A Terrible Mistake, 2020 - See chapter 8 for Sibony's corporate board groupthink example.


Taleb, Skin in the Game: The Hidden Asymmetries in Daily Life, 2018 - Nassim Nicholas Taleb describes social norming in a mathematical context of "renormalization." He demonstrates how "vocal minorities" are able to enforce their will via renormalization. This is an example of strategic groupthink, where a minority is able to renormalize the average group belief.


[xiii] Satya-Murti, Lockhart, Recognizing and reducing cognitive bias in clinical and forensic neurology, American Academy of Neurology, 2015


Tetlock, Gardner, Superforecasting: The Art and Science of Prediction, 2015


Expert Bias: In the world of expertise and forecasting, Tetlock makes the distinction between "Hedgehogs" and "Foxes." How dangerous is a hedgehog expert? As mentioned in the book: "Hedgehogs do slightly worse than random guessing." Hedgehogs tend to be singularly focused on a "big idea" as an expert. "[Hedgehogs] revealed an inverse correlation between fame and accuracy: the more famous an expert was, the less accurate he was."


[xiv] Kahneman, Klein, Conditions for Intuitive Expertise, American Psychologist, 2009


Sibony, You're About To Make A Terrible Mistake, 2020


[xv] Schwartz, The Paradox of Choice: Why More Is Less, 2005


[xvi] Johnson, The Elements of Choice: Why the Way We Decide Matters, 2021


Johnson does a nice job describing the impact of choice architecture, particularly as rendered by default and sort options. See Chapter 5, "Decisions by Default." He makes the point that choice architecture “designers” - like the sellers - do not always have the best interest of the “choosers” integrated into the choice architecture. This is a clarion call for being your own choice architect!

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