Few people know how to make a decision better than Daniel Kahneman. He won the 2002 Nobel Memorial Prize in Economic Sciences mastering the art of making a good call.
And most people are pretty bad at it, said Kahneman, 87, whose bestselling book "Thinking, Fast And Slow" summarizes his lifelong findings on decision making. It boils down to this: Most people allow groupthink, poor processes and confusion to muddle their judgment. And poor decision making is all the more prevalent in business. One error repeats: People think they're better at making decisions than they are.
"People are overconfident in their judgments," Kahneman, the world's leading researcher on decision-making told Investor's Business Daily. "They make mistakes because they are generally overly optimistic when they make plans and absolutely believe those plans will come through. Overconfidence in business forecasting is systemic."
Learn Broader Lessons From Your Experiences
Kahneman, professor emeritus at Princeton University, didn't set out to be an expert in decision making. But he found the opportunity from an unlikely place.
He earned a psychology degree from Hebrew University. But after graduation, he started his compulsory military service in the Israeli Defense Force. Among his tasks: Evaluate officer school candidates. He'd watch a group of eight candidates undergo a tough physical exercise that required teamwork. And he'd try to predict who would become good leaders.
Over time, though, he learned he was getting it wrong. Feedback from the leaders' performance in the field showed little link between soldiers' performance in the test and their success. It was his first exposure to this disconnect. He coined the term, "the illusion of validity," to describe it.
As the illusion of validity shows, psychology is imperfect. Kahneman is a perfectionist, though. So his painstaking efforts to improve decisions led to provable breakthroughs. That's because he simply wouldn't publish anything until he knew he found concrete facts. For instance, after receiving his PhD in 1961, he conducted a number of "competent" studies. He believed the findings interesting.
But he never published some of them "because I set myself impossible standards," he once wrote. "In order not to pollute the literature, I wanted to report only findings that I had replicated in detail at least once."
Find Knowledge In Darkness Like Daniel Kahneman
Kahneman's successful career began in a dark place, though. He grew up in France during World War II. His Jewish family hid in various locations around the country until the war's end. And eventually, they emigrated to Palestine.
"I remember it was enormously exciting and exhilarating not to be hunted," Kahneman said. "One of the things I felt during the war is that we were like rabbits. And of course in Israel that changed."
But even in darkness, Kahneman found inspiration. He recounts a time he missed curfew. So he turned his sweater inside out to hide the mandated Jewish star he wore. He was on his way home when a German solder approached. Kahneman tried to avoid him, but couldn't. The soldier picked him up, hugged him, showed him a picture of a boy, presumably his son, and gave Kahneman money.
Kahneman learned right there "people were endlessly complicated and interesting," he said. The random event set Kahneman up for a career thinking outside the confines of psychology. Around the time he graduated from high school, "I was interested in the standard philosophical question, 'Does God exist?'" Kahneman said. But later, "I was more interested in why do people believe God exists, which is a psychological question."
Kahneman: Unlock Opportunities In Shortcomings
As Kahneman dug further into his research, some of his own limitations slowed him down. He learned partnerships with people with skills he lacked would improve his own decisions.
"My aspirations demanded more statistical power and therefore much larger samples than I was intuitively inclined to run," Kahneman said.
So, in the late 1960s, Kahneman began collaborating with a younger colleague, Amos Tversky, whom he described as the smartest person he knew. It was a true partnership. Tversky, who passed in 1996, pioneered research in risk.
"We avoided any explicit division of labor," Kahneman wrote. "Our principle was to discuss any disagreement until it had been resolved to mutual satisfaction." That included any decision, including who to list as the senior author of a published paper. They decided that the old fashioned way: With a coin flip.
Relish Disagreement To Make Better Decisions
"Intense" collaboration, or even disagreement, is not to be avoided, Kahneman says. It's key to solid decision-making.
Kahneman found bouncing opinions off someone else like Tversky stopped flawed thought from being published. The two worked together for more than a decade, most notably in prospect theory and decision making. Ultimately, they found a breakthrough in applying their ideas to business decisions.
This seminal work led to the creation of the field of behavioral economics. This work is cited in Kahneman's Nobel Prize: "For having integrated insights from psychological research into economic science, especially concerning human judgment and decision-making under uncertainty."
"It was a complete accident," Kahneman said of his move into the business realm. "We (Kahneman and Tversky) started collaborating on decision making and some people from the business school." Specifically, they worked with economist and future Nobel Laureate Richard Thaler.
The results are legendary. With the late Tversky and others, Kahneman revealed obstacles that block rational decision making. All sorts of decisions, from hiring to planning, and both individually and in groups are often flawed.
Conquer Bad Decisions In Business Like Daniel Kahneman
Business is rife with bad calls, Kahneman says.
Specifically, new facilities are often built larger than needed. Kahneman suggests "looking at similar plans and similar decisions made in the past to get a more realistic idea of the right direction and reducing the probability of error."
He recommends using statistical models. And he supports using artificial intelligence in some cases to eliminate bias and noise that surround many decisions.
"There is no easy way to correct this (bias)," Kahneman said. "There are better ways and worse ways of planning and making decision. It's always a matter of compromising between analysis and intuitive judgments that are often rash."
Hiring decisions are often flawed. First impressions, both positive and negative, drive who gets an offer. It's what Kahneman calls the halo effect. It's better, he says, to create objective benchmarks.
That is, first decide on the important skills needed by the job. And then create questions that will elicit responses for each desired trait. Finally, score the responses. If meeting deadlines is important, ask about deadlines in an applicant's past. If punctuality is important, ask about that.
It's important, he said, to ask the same questions in the same order to each candidate. And if there is more than one interviewer, Kahneman says, they shouldn't speak to each other. They should make their recommendations independently.
"The way people can fail here is not properly deciding what the correct criteria for a job are," he said.
Stop Groupthink In Meetings
Kahneman also found business meetings to be flawed. Why? The first person to speak at a meeting usually steers the outcome.
To avoid what he calls the "wisdom of the crowd," Kahneman recommends participants "form an opinion in advance." They should then convey that to the chairperson prior to the meeting. Then have the group discuss what everyone said before reaching a final decision.
"This is a way for people to motivate people to form an opinion independent of others. The idea is to get people to reach conclusions in a more disciplined way," he said.
Olivier Sibony, co-author of Kahneman's most recent book, "Noise: A Flaw in Human Judgement," said: "When you look at some of the work Danny did 40 or 50 years ago, it has stood the test of time. That is probably because he was as demanding of himself then as he is now."
Kahneman doesn't get attached to ideas, until he proves them.
"Danny produces brilliant ideas, then he destroys them ... the idea is now better for surviving his scrutiny," Sibony said. "He actually enjoys that process of iteration. It seems there is nothing he likes more than finding a flaw in his own thinking."
Daniel Kahneman's Keys
