A Proposal for Humble Decision MakingAmitai Etzioni
In his 2011 best-selling book, Thinking Fast and Slow, Nobel Laureate Daniel Kahneman summarizes the findings of Behavioral Economics, which show that people cannot make rational decisions. Our brains are hardwired to process information poorly and draw wrong conclusions.
In response, I offer the Humble Decision-Making Theory, a few modest suggestions for how investors, managers, and consumers can deal with this fast-paced, data-packed world we inhabit.
Treat all decisions as “experiments.” Assume all decisions are wrong and will have to be revised, most likely several times. Do not invest your ego in the stock you bought or the course you chose. When things go awry, avoid what Kahneman calls “theory-induced blindness behavior” and double down. Sell the losing stock, tear up the plans, and reset your course.
Keep a large reserve of capital and time. Assume that the projects you launch will cost more, last longer, and face more difficulties than you anticipated. Half of small businesses fail within three years after they were founded because those who launched them underestimated how much capital or knowledge they would need to keep them going. Similarly, Pentagon officials have a saying known as the 2:2:½ rule: new weapons cost twice as much as estimated; take twice as long as planned; and do half the expected job.
Another reason for keeping a sizable reserve is that you should anticipate some unanticipated opportunities. These range from a chance to acquire an asset considered to be unlikely to come on the market, to someone being let go by a competitor whom you want to hire.
The less we know, the more we should hedge. Investment professionals recommend that individuals divide their investments among various instruments rather than investing in a single “better” one, because dividing assets among uncorrelated investments can help to set a tolerable level of risk for the investor and may actually make it easier to achieve the same returns with less risk. This rule applies to matters other than investment. Which line of R&D will bear fruit is particularly hard to predict. Hence, following more than one line is preferable to betting on one. The same concerns the question of which country is going to undergo political upheaval next.
Build in cooling-off mechanisms and arrangements. In addition to suffering from poorly honed brains, we are also under the influence of emotions. We benefit from setting up mechanisms that help us guard against being swayed unduly by emotions. Obvious steps include drafting a decision and “sleeping” on it, whether it entails a delay in announcing and implementing it for a night or quite a bit longer; testing the decision on others who do not share the same emotions the decision evokes in us; and role playing—pretending to be subject to the decision rather than the decision-maker.
At all times remember: It is the meek who will inherit the earth.
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