This post is part of the series on decision making. Building on the research around the factors of decision making open to influence, we explore 3 common decision scenarios (games as defined by Nash) and how you can improve your personal decision making.
Scenarios for decisions:
Consider the following situations:
- You win at the casino, and believe you have discovered a ‘method’ for winning every time you play.
- A relative passes away, and there is disagreement over the division of the estate, and the relationships are permanently damaged.
- You have a rival who would rather harm your chances more than get any benefit, as long as they do better than you they are happy to wear some pain, too.
- You are in a negotiation and you the other side is asking for and expecting impossible things from you, ensuring the negotiation goes nowhere even though the path seems obvious to you.
In each of these scenarios, the rational part of decision making (maximising personal welfare) is overtaken by the unconscious parts – the self effacing parts that are open to bias, manipulation and ‘bound’ any rationality that you could generate (see this post for more).
When we allow ourselves to use feelings, intuition or imagination to make our decisions we reduce the space for rationality. When we extend this to trying to interpret the actions or motives of others, we invite massive decision making errors. Look at the examples offered above – what errors can you immediately detect when looking a these scenarios objectively?
We invite errors when we allow our own decisions to be impacted by the subjective, unconscious errors that bound our rationality. We compound these when we make errors about the situation or the other parties in the decision process. For example:
- Narrative and confirmation bias meaning that you create a story about a pattern in the random play at the casino.
- Mind-reading and believing that others operate from the same motives and beliefs that you do.
- Comparative outcomes seeming more important that objective, welfare enhancing ones.
- Believing others have access to the same information as you, they have the same goals or same skills.
Understanding the games:
By recognising the type of decision making process we are taking part in, we can focus on the errors that are more likely to arise. Here are three ‘games’ (decision situations as described by Nash) that commonly occur.
Simultaneous decision making.
An example of simultaneous decision making is the game “rock paper scissors”. At the same time, we have to display our choice with no way of knowing what the other person will do. When the decision is a one-time event, we can have no prior learning and the result is likely to be based upon the random combination of the 2 simultaneous choices.
Sequential decision making
An example of sequential decision making are the games of chess or checkers. Each person takes a turn in order, and before we have to decide we have access to learning about previous moves and the current state of play.
Blinded asymmetric decisions
An example of a blinded asymmetric decision is seen in the famous “prisoner’s dilemma”. In this game, 2 people have to decide to either own up to a crime or claim innocence. If both claim innocence, they get off. If one confesses and the other doesn’t, the confessor gets a small penalty and the other receives a large penalty. If they both confess, they both get a medium penalty.
In this way, the outcome is determined by the parties acting blindly, with an asymmetrical outcome depending upon the combined individual choices. Consider how you would decide knowing that what you get is based upon the other person, to whom your response is blinded. Do you hope that they claim innocence and hope the other person does too, or is it better to cop a small or medium penalty?
Errors in the way we play the games.
Remembering the two elements of a decision – the logical (welfare enhancing) and the unconscious (self-effacing) processes allow us to see how we make errors in such games. The errors we make are most often related to the unconscious aspects of the decision – all of the biases and heuristics that impact our ‘rationality’ come into play.
Depending upon the game, the way we make errors change and impact the decision processes differently.
For simultaneous decisions, we have no true knowledge of what the other person will do. We often generate unsupported confidence in how we have made the decision, often rationalise the outcome and use confirmation bias. Considering the decision leads to a completely random outcome (unknown to either party in advance), most of the errors are around how we build beliefs and confidence is what going to happen. We also often believe that the decision is sequential when it is random, offering us supposed learning and ‘explanations’ to what happens (this is the casino scenario in a nutshell).
Optimism bias – and then confirmation bias that emerges from post decision rationalisation – changes our relationship to the decision process. If we are having a one-shot simultaneous decision and understand that the outcome is not related to our own capability, then we can approach the decision with greater clarity and less investment in the ‘meaning’ of the outcome.
For sequential decisions, we can make errors around pattern beliefs in how the other decision maker makes their choices, and make assumptions for how others are making decisions. Believing that the other person is always making rational choices is the biggest mistake – often their choices are contaminated with their unconscious bias and self-effacing errors. We cannot know why a person will choose the next move, even if there is a clear pattern of how they have decided before. Perhaps they have games a flash of insight, have learned something in flight, or are even simply distracted? We make assumptions about skills, consistency, goal orientation, belief sets and the rationality of others as the basis for generating ‘confidence’ in taking or explaining decisions. Whilst we can learn from past patterns, there is still always a large chance that we are only able to ‘guess’ only a small part of the person’s internal world, and therefore open to error.
For the blinded asymmetrical decision, it is easy to believe that the other individual is operating from the same beliefs as we are. However, a person’s risk tolerance, belief sets, skills, capabilities, self-assessments and understanding may be very different from our own. This type of game requires that we imagine what the other person will do as a way of informing our own choice – something which is impossible to do even for ourselves! The rational choice is for both people to maximise their welfare, however this changes as their belief in how the other person will act shifts as well.
The problem of comparative value:
Sometimes people need to ‘win’ regardless of the cost. They can actually have a rationally terrible outcome – provided it is better than what a comparator receives. In the end, they might even seek to punish the comparative individual even though it has a cost to themselves. This happens with rivals at work, for example.
This happens so often in relationships – the self effacing part of the decision making means that the outcome is relative – if the other party is punished then they are happy to accept a small penalty to achieve this – as long it is not as big as the other person gets.
Shifting focus back to the real welfare available in the decision rather than comparisons to others is critical here. If you don’t care what others get but your welfare actually improves, you are in the space of making a more rational decision.
Bad decision making has real costs:
Implying that we understand how people make decisions creates all sorts of errors. In the family estate example, the belief that everyone s operating from the same goals, beliefs and frames of reference are usually wrong. This is compounded by the additional ‘emotional’ elements that are introduced into the scenario. Feelings are amplified and situations that should be rationally managed can descend into painful and damaging scenarios that destroy relationships for ever. The cost of focusing on the wrong things can be massive.
At an executive education course I attended, we had to play a ‘negotiation’ game. It was clear that there were ‘best outcome’ scenarios if people shifted from adversarial positions to collaborative ones. The person I was paired against was so set on ‘winning’ each small element, that even explaining the bigger game of ‘winning versus other teams’ was not enough for him to let go of his stance. In the end, he had to ‘win’ each point and it meant that our overall result was actually very poor. My partner was not willing to shift his thinking or beliefs, and was driven by self effacing unconscious processes that harmed his ability to enhance his rational ‘welfare’. Instead, we pent the time serving his unconscious need to be seen as a ‘winner’.
Understanding the errors we make allow us to make better decisions. When we stop playing ‘games’ and understand the nature of the decision game that we are involved in, we can be on alert to errors that we make.
What are your common errors in decision making?
Where are you allowing your rationality to be bounded by your biases, beliefs and feelings to impact what you can achieve?
To find out how to be a better decision maker and play better games then contact me now.
