The Data Behind Our Decisions

As a general rule, I would say that we Booth students like to think of ourselves as rational decision makers.  Many of us are economists by trade, hobby or close association and consider ourselves logical and analytic thinkers. We know what we want and we decide rationally how we are going to get it based on the facts.

Or do we?

The study of behavioral economics was the foundation for our class on decision making taught by Prof. Richard Thaler, co-author of Nudge. Much of the course seemed like common sense at first. Of course, we know that placing the candy three feet off the floor in the checkout aisle makes kids nag their parents and ultimately increases sales.  It turns out, however, that even a room full of brainy MBA students can be influenced in similar ways due in part to the variety of unconscious short cuts we use to simplify and speed up the process of decisions making. These are often much subtler signals than ending up with some strange new candy bar in your shopping cart.

Turns out that even when no one is nagging us, we are likely to eat 35% more food when we eat with one other person!  And the study in Nudge goes on to show that it gets worse. In the presence of three other people we eat 75% more and a whopping 96% more in a group of seven or more people!  So maybe we don’t decide rationally for ourselves after all. Clearly our behavior is influenced by others in ways we don’t even realize.

Thaler’s class also convinced me that we rely far more on our personal experience to make decisions than we do objective criteria. We overestimate our subjective opinion and underestimate the data – and we do this frequently. In fact, the smarter and more successful we are, the more likely we are to rely on our past experience because we consider our brilliant decisions in the past to be part of the reason we have done so well.  For example, you might hire someone based on a gut feeling and a resemblance to the superstar you found last year (also hired on gut feeling) even though there are holes in his experience and signs that he is a poor fit with company culture.

Perhaps you made money on an entrepreneur’s last business so you agree to back the next without performing the same due diligence on the market viability of the new product. Or maybe you got sick at a particular Chinese restaurant so now you always go to the one down the street despite new management at the first place and low health ratings at your new favorite. The facts just don’t line up with our perceived reality, yet we trudge full steam ahead based on the surety that our decision is correct. As Mark Twain said, “It ain’t what you don’t know that gets you in trouble. It’s what you know for sure that just ain’t so.”

Many of the concepts surrounding decision making are fairly basic, but the data behind myriad experiments in this field show some fascinating and surprising results. They prove just how unaware we are of the simple yet unconscious ways our choices are manipulated. They illustrate how well we would be served to learn more about the cognitive biases that drive this behavior. It may seem like “soft science” but the data behind decisions shows what a tangible and profound effect these concepts have on the choices we make at home and at work, as well as the behavior of society and even the financial markets – whether we know it or not.

If you have time for a quick yet enlightening read, I recommend Nudge for some thoughts on how we can use this knowledge to help ourselves and others make better decisions. For a variety of related thoughts and some interesting experiments on choice and decision making, check out some of the TED talks below.  (Try squeezing them in your busy day by watching them while you’re on the treadmill – on your new iPad of course!)

Elizabeth Rogers, an Executive MBA student at the University of Chicago’s Booth School of Business, blogs about her journey through an EMBA program for Poets&Quants. Her earlier posts:

Introducing Elizabeth, an EMBA Student at Chicago Booth

Finding Your Rhythm

School’s Out For Summer

What’s Really Harder Than The Soft Stuff

My Favorite MBA Study Tool: The iPad

Don’t Study

 

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