Management Lessons from ‘Thinking Fast and Slow’
By- Daniel Kahneman
Daniel Kahneman is an Israeli psychologist who has done notable work on the psychology of judgement, decision making and behavioural economics. In 2002, Kahneman was awarded the Nobel Prize for Economics for his groundbreaking work in the field of behavioural economics, decision making and to be specific, the prospect theory. Kahneman along with his colleague Amos Twersky was set out to undermine the existing notions of rational behaviour of human beings which formed the backbone of almost every economic theory that exists.
In his book, ‘Thinking Fast and Slow’ Kahneman starts by explaining the very basic aspects of how a human brain works to make a decision. How Automatic System 1 (intuition) makes a decision quickly, which is more often than not affected by biases. However, System 2 makes more refined judgment but is seldom called for action, due to our overconfidence in our Automatic Memory. The works of Kahneman and Twersky proved that there are twenty or more ‘cognitive biases’ that unconsciously rule our little human brain and may misguide our judgement. They have also provided us with the possible techniques that we could use to neutralize the effects of such unconscious biases and hence make more refined judgments.
Furthermore, in this article, I would like to highlight the all-important lessons management or a leader could derive to enhance their decision making thereby, benefiting their organisation.
— Making Future Predictions
How often are managers, leaders, entrepreneurs or anyone are required to predict a quantitative variable (like profit, growth or sales) and they just tend to say the first intuitive prediction that comes to their mind based on their existing knowledge on the subject or even our anchors based on other related predictors. But are they right to do so? No, our intuitive prediction is seldom right and it is nothing but a result of the overconfident thinking of our Automatic System 1. So, there is a need for ‘ taming our intuitive prediction’ which Kahneman suggests could be done following just a few simple steps (which also means calling System 1 for action)
Step 1. Start with the baseline or the average prediction
Step 2. Make your intuitive prediction based on evaluation of evidence
Step 3. Estimate the correlation between the evidence and the average prediction
Step 4. Move your prediction from the baseline towards your intuition to the extent of correlation between them.
Following these four steps gives us a prediction that is influenced by our prediction but is far more moderate and regressed towards the mean.
— Human Resources- Intuition vs. Formulas
In 1955, Daniel Kahneman was assigned to set up an interview system for the recruitment of personnel in the entire Israeli army. Based on the follow-up evaluations, Kahneman found that the interview procedure that was already in place was not appropriate to hire recruits that would succeed. Through his research, Kahneman found out that the existing interview process was affected by the halo effect where the favourable first impressions influenced the overall judgement of the recruiters. Therefore, in order to solve this judgement bias arising out of the unconscious halo effect, Kahneman took a page out of Paul Meehl’s book Clinical vs. Statistical Prediction: A theoretical analysis and a review of the Evidence.
Kahneman succeeded in devising an interview process that was free from the error in judgement arising out of the halo effect and was based on a statistical summary of separately evaluated attributes. The six-step recruiting process that Kahneman suggested evaluated to much better results.
Step 1. Select 6 traits that are useful in that position. Make sure that all 6 traits are independent of each other.
Step 2. Make some factual questions based on each trait.
Step 3. Score each question on a scale of 1–5
Step 4. To avoid the Halo effect score one at a time before you move to the next question.
Step 5. Do not skip around between questions.
Step 6. Add up the scores of all the questions. Select the candidate with the highest score even if you think otherwise.
Next time if you wish to hire someone who could succeed in their role and at the same time be the future of your organisation. Do not trust your System 1. Sit back and bring System 2 to action.
— Taming Optimistic Illusions
Optimism is a key character trait that drives businesses. While optimism is generally considered a positive trait, however, it can have its negative aspects too. Businesses generally tend to be more optimistic and risk-seeking and in the process, they tend to overlook the challenges or competition associated with a venture. In the United States alone, the chances that a small business will survive for five years is 35%. But the people who start such small businesses feel that these statistics do not apply to their business. Given the average odds of success, 81% of entrepreneurs state their personal odds of success as 7 out of 10 and 33% believe that their chance of failing is zero.
More often than not this optimism and over-enthusiasm on part of organizations lead to them overlooking the possible challenges and competition they might have to face in the path of success. As a possible remedy to this problem, Kahneman suggests Gary Klein’s method of ‘premortem’. Premortem is a simple procedure that can be used by organisations to tame optimism to a certain extent.
When the organisation has almost come to an important decision but has not formally committed itself, Klein proposes gathering for a brief session a group of individuals who are knowledgeable about the decision. The premise of the session is a short speech: “ Imagine that we are a year into the future. We implemented the plan as it now exists. The outcome was a disaster. Please take 5 to 10 minutes to write a brief history of that disaster.”
However, taming optimism techniques need to be executed with utmost care. Optimism still remains an essential driving force of both individuals and organisations. We just need to keep a check on the fact that we are not overdoing it.
Amidst many other insights that this book has got to offer here are a few that I felt might have gone unnoticed and are certainly good techniques to have for any manager ( any individual for that matter). Although the entire book focuses on biases prevalent by thinking using System 1 and promotes the development and the usage of System 2. However, from time to time going with your intuition might make you happy, even if your choices are not the same as desired.
The voice of reason may be much fainter than the loud and clear voice of an erroneous intuition, and questioning your intuitions is unpleasant when you face the stress of a big decision. More doubt is the last thing you want when you are in trouble.
We all are a part of the globalized world where the irregularities are such that the predictions for the next second cannot be trusted with the level of irregularities present in our environment. What we can learn is to activate that dormant System 2 and think before we act on the decisions made by restive System 1. However, the zeal of System 1 should not die.
