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#58 - Risk, regret, and decision-making
Plus: The relationship between information and commitment
Hello, all new subscribers of Curiosity > Certainty! Welcome all to issue #58 of Curiosity > Certainty, my weekly download of thoughts on how to think better! 👏
This week we dive deep into decision-making in the face of imperfect information. What demands does uncertainty make on us? How does it test our commitment? How do we minimize regret? Should we wait for more information or commit? What happens if we do take the plunge? This has been a most different issue since it takes one topic and peels off the layers. So could you do me a favor? Let me know what you make of it.
Let’s get started…
A commitment problem cannot be solved by information.
One of the common decision-making mistakes is confusing your need to commit to something with your need for more information.
This one confusion causes:
Endless back and forth
Dragging your feet.
It is energy-sapping. Exasperating.
But you can clear out the brain fog. In fact, you’re one step closer just by having spotted the problem. Imagine how much you could gain by solving it.
Let’s say there’s someone you’re considering spending your life with. You’ve dated long enough. You’ve seen him in good times and bad.
Yet, it’s a big decision. You ask friends and family. You hear the same things–’he’s so funny, he cares about you!’ You knew those things already. Around that time, you hear about this friend whose husband turned out to be, well, not the same man who went down on his knees. You start second-guessing. You feel like you need to know more.
Ask yourself: ‘Is any of this information that has me second-guessing both new and relevant?’ The answer will tell you if your solution is information or commitment.
Now ask yourself a second question, the deciding one: ‘How would I feel if I lost this opportunity?’ If you feel uneasy, take the plunge! If you’re at peace, move on. Either way, your problem is not information. It is your constitution.
This advice is not only for those getting cold feet in love. You can replace choosing a partner with investing in a company, buying a house, going public, starting a business, or any other hard decision. In none of these cases, beyond a point, can your commitment problem be solved by more information.
And that point is simple. Yes, you want to collect reliable information. But once you start finding the same things or start losing opportunities, it is a sign that you already know. You just need to act.
You’re not risk-averse. You’re regret-averse. But which kind of regret?
You’ve been at this job forever. It is going nowhere. But you know the job inside and out, and the people are familiar.
A part of you is afraid of making a change; another fears getting stuck.
What’s behind your fear to make a change? Regret.
And what feeds your fear of getting stuck? Regret.
The first kind is forward regret. Looking ahead, you see yourself living the consequences of a decision gone wrong–a worse job, a worse pay, a worse culture. You stay put.
The second kind is backward regret. This is what Jeff Bezos has baked into Amazon (as part of the regret minimization framework). You imagine your 80-year-old self looking back at life and wondering what you could have done differently.
Forward regret is what if it gets worse than what it is now? Backward regret is why didn’t I try?
Regret is a powerful driver of your actions. It can cloud your judgment as much as it can clarify it.
When you’re in a fix, forward regret may make you want to hold on to the status quo. You anticipate regretting a change so you stay put. The trick at this point is to switch direction and look back. ‘How would I feel at age eighty?’
My guess is that it is the band of forward-regret-averse people who have chosen a language for us. That is why they have us call it a comfort zone. I can imagine Bezos calling it a discomfort zone.
But maybe an information problem can be solved by commitment…
The Bezos way of risk minimization demands an action bias. The way it does so is by teleporting you to your 80-year-old self. Which is a pretty nifty time-travel device to get you off your decision-making fence.
But why should action bias work?
There are two researchers and their life’s work that perhaps suggest why a bias for action may make sense: Amors Tversky and Daniel Kahneman and their work on prospect theory.
Here’s prospect theory in a nutshell:
We are concerned with gains and losses rather than with absolute wealth (everyone hates to lose),
AND the decision weight we attach to an outcome is different from its probability.
The second part has deep implications for the way we decide. Let me dive into it.
Caption: Image from Chapter 29 “The Fourfold Pattern” - Thinking, Fast and Slow
Tversky and Kahneman showed that decision weights match probability at both ends–at 0 and 100. That is expected. When there’s a 0% chance of an outcome we don’t give it any weight; when there’s a 100% chance, we take it as certain.
But It is what happens between the ends that’s worth noticing.
We overweight improbable outcomes. By the table, we lend as much as 18.6 weight for a 10% chance.
And we underweight highly likely outcomes: attach just 87.1 weight for a 98% chance.
What does this mean?
We’re optimistic (risk-takers) when there’s even a small chance of a large gain. That’s how we’re not daunted by a long shot. Think of a lottery ticket.
We’re pessimistic (risk-averse) when there’s even a small chance of a large loss. That’s how we’re willing to pay disproportionately more to eliminate the slim risk with certainty. Think of your insurance premium–money you pay to avoid a negative outcome with a low probability.
Now let’s go back to the decision you’re stuck with and see how prospect theory explains your thinking.
Imagine you get new information about a choice you have to make. The probability of the outcome should shift because of it. But because you are insufficiently sensitive to changes in probability, it may not shift enough to make you change your mind.
The table gives this away. A probability of 90% carries a decision weight of 71.2 and a probability of 10% carries a decision weight of 18.6. The ratio of probabilities is 9.00 but that of decision weights is only 3.83. So the needle of probability has to move much much more for you to acknowledge the shifting of odds. Think of a weighing scale that shows you weight in increments of 5 kilograms. What do you see when you lose 3.7 kilograms? Nothing. The needle doesn’t move.
If you have limited means to process new information and bake it into your decision-making, what point does it make to wait for it? Shouldn’t you rather jump?
I write on decision-making to distil what I have learned from the best and to reality-test my thinking. If you find this interesting, hit subscribe to receive weekly food for thought.
And how would you feel if you took the leap?
In other words, how does a bias for action make you feel emotionally?
There’s an unusual and famous social experiment to shed some light on this.
Steven Levitt, the author of Freakonomics, was curious about how people approached life’s big dilemmas: having a child, quitting a job, breaking up, and so on. So he set up a website, enrolled participants who were in a dilemma, and got them to flip a virtual coin. The agreement was: heads, make a change; tails, keep the status quo.
Following up after 6 months, Levitt found that those who had made the change were more likely to report being happier than those who did not. The bigger the change, the clearer this pattern.
This is/was not a controlled scientific experiment, though even as a social experiment (30,000+ people have participated till date), it holds a mirror to human behavior.
If going for a meaningful change makes us feel better about ourselves and we’re largely insensitive to shifting odds, is it surprising that some of us may be tempted to take a punt on life decisions?
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