Psychology of Personal Decision-Making

“It is not certain that everything is uncertain”

 Uncertainty!

“If we can’t be certain about future consequences of alternatives, how can we be confident we choose best?”

 Uncertainty Proof Our Alternatives!  Robust ▪ Assumes little about predicting the future  Non Quantitative  Strategies like diversification and risk sharing  Sensitivity Analysis  Maximize EV (later)

 We tend to be overly confident in our beliefs  Requires effort to doubt ourselves  We rely on what we know to predict the future  There are problems with this  What’s the risk in the status quo? ▪ Rarely ask ourselves that! ▪ SQ is usually perceived as less risky ▪ Flemings on Kitchen Nightmares

 Bonds are worth a specified number of dollars in the future  People think of them as “safer” or “less risky”  Stock prices can adjust for inflation – especially internationally  “Risk-free” bonds could be riskier than stocks!

 Home prices, mortgage nonsense and subsequent bubble  People building in flood plains  TAKE AWAY: Anticipating uncertainty is an important part of structuring decision opportunities  Requires creative thought ▪ Stimulus variation

 Look at your fact table  What entries are you most uncertain about?  Look at your 1-10 table  What entries are you most uncertain about?  Look at your alternatives  Which alternative is the biggest gamble?  What could go wrong?  What could go right?

 Royal Dutch Shell  Put bounds on the future ▪ Might wish to share process with Exxon and BP!  Think of best and worst outcomes ▪ #1 Put best in one scenario ▪ #2 Put all worse in another ▪ #3 Derive plausible scenarios from combinations ▪ #4 Imagine how stakeholder(s) would respond in those situations and PLAN  Makes the improbable vivid, if not more probable

 How to think better about multiple futures

 Reliance on mental habits (status quo)  Limited processing capacity  Defensive avoidance (motivational)  Warning signs: ▪ Excessive emotionality ▪ Unwillingness to think through alternatives  Countermeasures: ▪ Realistic hope we can deal with uncertainty ▪ Emotional distance from the problem ▪ Process orientation

 After the decision has been made and the future has arrived!  Intensity of regret increases with the severity of the loss (Bell, 1982)  Consequence of poor judgment not at decision point, yet at the time you’re feeling it!

 Looking forward we experience less uncertainty than we should  Looking backward we experience even less uncertainty than when looking forward

 Belief the way things actually turned out was easy to foresee  Countermeasures  Remind yourself of what you knew at the time of decision (therapy)  Prepare yourself to live with the worst scenario (inoculation) ▪ Also prepare to remind yourself what was known (therapy preparation)

 Control  Obtaining information  Keeping options open  Diversifying  Sharing Risk

 Increase probabilities of desirable outcomes:  Seeding rain clouds to sell umbrellas  Test runs – travel relationships  Joining organizations/activities to get a mate  Start the search early and let a lot of people know to get a job  When using control, account for  Time, money, risk to personal feelings

 Waiting  ADVANTAGES: Costs tend to be lower  DISADVANTAGES: Procrastination, other windows of opportunities can close  WEIGH: Benefits of waiting against the costs of waiting  Seeking: some associated cost  Looking, asking advice, research, or trying things out (retirement couple)  Ask yourself: “When would be the best time to make this decision?”

 AKA “Contingency planning”  Have a fallback plan  Ask: “What do I do if this doesn’t work?”  Have resource reserves: people, money, time  Consider when these values appear in your table to weight them more!

 Seek reversible alternatives  Don’t burn bridges!  SPR, CPF, and CP… and 1bog

 If you like risky investments, consider making 20 of them instead of 1  Can think of diversification outside of $!  Emotional diversity  Network of friends  Spousal death

 If in a leadership position, share decision making process  + organizational justice perceptions ▪ + retention, affective org. commitment, and OCBs

 “If a difference makes no difference, don’t give it any more thought!”

 How does new car react to the way you normally drive?  For decisions:  Tests your model against your intuition and allows you to trust it more ▪ Like flexing out a rental car  Guides your future work on the decision ▪ Don’t think about aspects of decisions which don’t matter!

 Procedure: 1. Identify one or more columns with high importance weights 2. Identify 2 or more rows with high total values 3. Focus on the cells with at the intersections which you’re uncertain 4. Tweak changes in direction that can change your decision 5. Think of values and events that could change your decision