Do we really think rationally, or is our brain playing tricks on us? Nobel Memorial Prize in Economic Sciences laureate Daniel Kahneman suggests the latter in his best-seller: Thinking, Fast and Slow.
On the surface, our decision making seems to be a pretty logical process. If we look back on some of our past decisions, we’re typically able to point out certain key reasons that led to the final result. “Everyone loves iPhones and Macbooks, so buying Apple stock was an easy decision.”
Yet we frequently miss out on observing the many other factors which might have influenced our decision. Perhaps we happen to know many people who own iPhones. Maybe we got an iPhone as a birthday gift one time and it’s stuck with us ever since. Maybe we’ve been seeing a lot of Apple advertisements on TV lately.
All of these events are embedding positive signals of Apple into our brains. Even when that signal might be out of context, to our brain it’s a +1 (or more) for Apple. A positive psychological bias has been introduced into our brains.
There are many of these kinds of biases that influence our decision making one way or the other. Consuming alcohol reduces our willpower, leading us to make some not-so-good decisions. Seeing advertisements reminds us of certain brands, making it more likely to buy from them. Our liking to certain activities and hobbies is greatly influenced by that which we’re exposed to. Europeans prefer their version of “football” over the American one. And that makes sense, it’s always on TV there, on billboards, and the subject of conversion at parties.
Whether we like it or not, psychological biases will be there influencing our decisions. The first step to getting past these is figuring out what they are. Then, we can figure out how to handle them.
Here we’ll go through three which have been studied to be particularly predictable.
Anchoring is a psychological bias that pins our thinking closer towards a certain point — that point is a number that acts as the anchor. Typically, that number is actually irrelevant to the situation and decision to be made at hand! It’s simply there as a decoy.
One example of this given in Kahneman’s book was a study done by psychologists Strack & Mussweiler (1997). They asked a set of participants whether Gandhi was more than 140 years old when he died, and if so how old was he when he died. As a result, the mean estimate for his age of death was 67 years old. The second half of their study took a different set of participants, and this time asked them if Gandhi was older than 9 years old when he died. The mean answer for his age of death was 50 years old!
Anchoring is a technique commonly used when negotiating salary, and you can use it to your advantage. When making an offer, recruiters will typically use a low anchor to try and pin the conversation down to a lower level. For example, if your skillset in the market is worth $100k per year, they might initially offer you $80k, just to get your mindset on the lower end.
The trick here is to move past the psychological bias and simply ignore that lower number. It’s irrelevant. You’re worth $100k, so any other proposed number shouldn’t even be on the table in your mind. Simply continue with the negotiations stating the number you’re looking for.
If you’re really confident in yourself here you can take it a step further and make a high anchor move. Propose a larger number like $120k to the recruiter. It’ll pin the conversation on the higher end with the added bonus of signaling to your potential employer that “hey, this person’s confident and knows their worth.”
The availability heuristic is a mental shortcut that our brains take in order to make certain judgments, typically probabilistic ones. To put it in very simple terms as Kahneman does “if you can think of it, it must be important” — that’s what your brain is thinking!
Let’s take the example of buying Apple stock once again. By showing you ads on TV, advertisers such as Apple are able to plant this seed of availability into your brain. Later on, once you’re deciding which stock to buy next, Apple readily comes to mind as a good choice, only because you can remember it more easily than other brands. Your brain is pushing it right to the front, just because you’ve seen it more often.
The tricky part is that the way our brains set the significance of events based on our ability to recall them may not always be correct. So while you’re casually browsing through pages on Google or YouTube, your brain is being primed up for sales, even though that might not be what you want.
The great part is that we can use our brain’s predictable behavior when it comes to availability to our advantage. Need to feel more positive? Well, the best way is to try to surface more positive things in your life.
Social media is typically filled with advertising and attention-grabbing fluff, but you can change that. Why not follow some more inspirational profiles on Twitter, such as those advertising new advancements in science or sports, rather than some politician that’s only going to make you angry? Try to make more friends with people who have a growth mindset, rather than those who complain about their dead-end jobs. Such actions will make sure you’re hearing and seeing more positive things.
Loss aversion is a bias easily relatable to most of us. The main idea is that psychologically, we’re going to perceive a feeling of more pain when we lose something than the pleasure we feel from gaining something of equal value.
Let’s say for example your friend offers you an investment: to give him $100 for a 50/50 chance that you’ll win back an additional $150 or you lose all of your money. Would you take it?
Most people wouldn’t. In fact, Thinking, Fast and Slow cites that most people perceive potential losses to be twice as painful as potential gains of the same magnitude. So they’d need an upside of $200 to feel comfortable.
It makes sense, doesn’t it? We’re extremely careful when purchasing investments and prefer to have things that are rock solid, even if that means sacrificing some returns. Many would opt to have a job rather than do potentially more lucrative contracting, simply due to the safety they perceive psychologically.
The thing to be careful of here is falling into the trap of unwarranted risk aversion. Because people get so scared of losing anything, they stop taking risks, they stop taking those big shots. But those big shots are what’s going to pull them up to that next level!
I’ve seen friends that won’t do anything extra to try and advance their career, with the excuse that “well if I don’t move up, then all the extra work will have been for nothing. I could have just watched Netflix instead.” In some sense, it’s a safe play. But if we’re going to be truly rational, then you’ll never really know if you’d move up faster unless you tried, unless you took on the extra bit of risk. If you want to move up, you have no choice but to try!
The key to getting past this psychological bias of loss aversion is to re-frame things more logically. Yes, you could potentially lose $100. But on paper, you also have an equal chance to win $150, so the investment makes sense, in a mathematical framework at least.
A good way of handling this is to write things down. By writing them down on a sheet of paper and actually doing the calculations, it’ll be easier to convince yourself that the risk is worth it — it’s mathematical. If you’re still not convinced, Kahneman suggests stacking your decisions. Perhaps one decision of investing $100 seems risky. But throughout your whole life, if you do the same investment 100 times, there’s much much less of a chance that you’ll lose money. Your de-risking here, both mathematically and psychologically, to help you make the rational decision.
Would I recommend this book?
Kahneman is an incredible author and does an excellent job of breaking down complicated concepts into very easy to understand and useful information. All of his claims are backed by empirical studies with real data.