Emotions vs Rational Logic: Which Comes First?

I’m reading an interesting book by Jonah Lehrer, How We Decide. It’s surprising, for sure. Here’s what I’m learning…

In 2002, the Nobel Prize for economics was awarded to psychology professor, Daniel Kahneman, whose studies proved behyond any doubt that we behave emotionally first, rationally second.

Kahneman’s Prospect Theory and the work he did with Amos Tversky on judgment and decision-making have revolutionized the way we see people make decisions, and how we see leaders fail to guide companies with good judgment.

Deal or No Deal is a popular TV game show that  shows dramatic evidence of the role of emotions in making decisions. It’s entertaining because the vast majority of contestants don’t make decisions based on mathematical probabilities. And we can see their folly, their arrogance, or their cautiousness manifest itself.

The game shows that people can be fooled by their emotional brain. Contestants make terrible choices, rejecting deals that they should accept. They lose fortunes because they trust their emotions at the wrong moment.

Researchers who have studied people on the show conclude that it’s almost designed to be an economics experiment.

Which makes me think about CEO decision making. How easily we are fooled by our emotions. When people make a decision that leads to a loss, they can’t help but be influenced by their emotions. In some cases, they throw good money after bad.

When decisions pay-off, and there’s a win, feelings are high, and leaders are more likely to feel lucky and want to extend their streak.

Decisions are influenced by words. A choice phrased in negative terms, suggesting loss, is less likely to be chosen than one phrased in terms of percentage chance of gain. When possible outcomes are stated in terms of loss, decision-makers will avoid that choice even if it means they risk losing everything.

This is called loss aversion, first demonstrated in the late 70s by Kahneman and Tversky and it illuminates one of many of the brain’s hard-wired defects.

Individuals don’t carefully evaluate information, nor do they compute probabilities, nor do they even think much at all, when it comes to deciding. Instead, the brain uses shortcuts, heuristics and instincts.

If given a choice, the brain would prefer skipping the caloric-intense work of thinking and skip right on over to coin-flipping or gut feelings. It burns up a tremendous amount of energy to put the brain through the rational decision making process.

Loss aversion is an innate flaw and we are all vulnerable to it. It’s part of a larger psychological phenomenon known as negativity bias which means that for the human mind, bad is stronger than good. The only way to avoid loss aversion is to know about it, and to avoid the consequences of making decisions without being aware of it.

Think about the most recent decision you had to make. What did you think about most, gain or loss? Risk or reward? Pain or pleasure? …or did you convince yourself you made your decision based solely on logic and rational options?

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