Behavioral Economics (BE), a mash-up of psychology and economics, originally interested me because it promised a way to understand and predict mistakes that people make. This helped me do a better job as a banker to governments and nonprofits, because I could help them (and me) avoid those mistakes. It took a while for me to learn about the more optimistic, glass half-full, side of BE: under certain circumstances, experts can be very good at using intuitions and experience to make the decisions that matter. With the right kind of education and training and in the right contexts, we can all make excellent decisions most of the time. If I want to make better decisions myself and help others do the same, I need a way to synthesize these two perspectives and use the right approach for each decision.
So, let’s start with the half-empty view of human rationality. Kahneman and Klein’s excellent 2009 paper, Conditions for intuitive expertise: A failure to disagree gets us started They explain how the “Heuristics and Biases (HB)” perspective “favors a skeptical attitude towards expertise and human judgment.” Humans are inconsistent, too often making different decisions even when the facts are similar, based on unrelated factors. Our present-bias, loss aversion, overconfidence and hundreds of other biases can explain everything from investment underperformance, under-saving for retirement and high obesity to poor voter turnout and much, much more. It also offers surprising, optical illusion-like puzzles (What do you mean ?!)
Mr. Thaler proposes as a solution an oxymoronic “” that has governments, companies and the academic élite designing behavioral interventions “” to get people to save, donate their organs and spend more at the store. We may also need to have algorithms make decisions for us that are consistent, fair and evidence-based. At the very least, we need to slow down and make more decisions deliberatively.
The half-full, “Naturalistic Decision Making” view admires how “intuitive judgments can arise from genuine skill”. Gerd Gigerenzer’s Risk Savvy argues that people are essentially good at decision-making; they just need better education in how to think about and manage risk. Gary Klein in Sources of Power offers many examples of experienced decision makers, relying solely on experience, hunches and heuristics make fast, often brilliant decisions under stress, saving lives in the process. (Here, in the hands of experts, heuristics are effective tools, not biased and error-prone as in HB above.)
Perhaps we underestimate the power of intuition. Unless you’re a casino operator, physicist (in the age of Newton) or a computer program, the world is inherently messy, complex and chaotic. This means there are diminishing and maybe even negative returns to researching, analyzing, calculating and deliberating a decision because the best choice just isn’t knowable. Under certain conditions, intuition may well be the best tool for the job.
Happily, the two authors of the paper cited above agree there are circumstances under which expert intuition is a legitimate way to make decisions:
- The environment in which the decision maker has learned her craft must have been a “high-validity” environment. This means that outcomes and events are generally predictable from certain objective observations. Medicine and firefighting are generally much higher validity environments than politics and capital markets. (You are generally better off trusting the judgments of experts in the former group than “experts” in the latter.)
- The decision-maker has had the opportunity for deliberate practice over a sufficient time, which includes relevant and timely feedback about the quality of each decision, ideally with a very engaged coach.
So, can we synthesize holistic view of decision-making from these two perspectives? I propose a simple, two-by-two matrix to help guide when to use intuition and rules-of-thumb, deliberation and analysis, or just some random device. The chart below classifies almost any decision according to your experience/expertise and the time available to make that decision and suggests the best decision process(es) to use:
- If you have a lot of time but no expertise, you should research, deliberate and analyze, and don’t rely so much on your intuition.
- If you have plenty of both expertise and time, you should rely primarily on your intuition, but back it up with some analysis as a check.
- If you have a lot of expertise and little time (and a high-validity environment): rely on your intuition to choose the correct short-cut, like take-the-best or “naive” diversification.
- Finally, if you have neither expertise nor time (and you can’t delegate the decision to someone in a better position), just flip a coin or ask even ask a magic 8-ball and get on with your life. I believe it is primarily in this last case that nudges are useful, appropriate and respectful.
What do you think?
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An earlier version was published on Quora March 30, 2017.