This is part 2 of my takeaways from Thinking Fast & Slow. You can check out part 1 that summarises four key practical takeaways. In this post, I look at three more concepts.
Imagine you are a manufacturer in the downturn (kind of relevant given the scenario today). You find yourself needing to cut costs. You have three plants and a total of 6000 jobs dependent on them. There are two different scenarios described below. In each of the scenarios, there are two plans that have been presented to you and you need to select one to execute. Note down your choice of plan to execute, in both the scenarios.
Scenario 1
Plan A will lead to saving one of the plants and all its 2000 jobs
Plan B requires you to do something that has a 1/3rd chance of saving all the three plants and all the 6000 jobs but also stand 2/3rd chance of losing everything
Scenario 2
Plan A will lose two plants and the related 4000 jobs
Plan B requires you to do something that has 2/3rd chance of losing all three plants and all 6000 jobs but also stands a 1/3rd chance of losing nothing
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What were your choices of plans in the two scenarios?
You no doubt, chose the option A in the first scenario. You’ll not be surprised to note that in the second scenario, 82% people, chose option B.
If you’ve done basic mathematics, you’ll know there’s no difference in both the sets of scenarios. The only thing that is different, is the use of words to express the underlying risk in the plans. This is the crux of the concept of loss aversion. We dramatically switch risk preferences on the basis of emphasis on losses or gains. In the first scenario, the options framed were as gains. When we have a certain gain, we want to hold on to it. After all, a bird in the hand is…
In the second scenario, the options are framed as losses. When we are about to lose something, we do anything to avoid it, even if it means incurring a bigger loss. This is loss aversion and is rooted in our psyche. It is hard for us to come to terms with losing anything but this knowledge can be used to get people to change their ways and adopt new things.
To trigger a change, you always have two options. You can either highlight the benefits of changing and moving to the new ways or the underscore the prospective costs of not changing or adapting to new ways. The option you pick should be based on people’s perception of the new behavior.
This one sort of builds over the loss aversion concept of how options framing affects our decision making. When looking at choices or options, it makes sense to look at things in broad fashion to see if it makes sense in the long run. For ex: you may want to reject a bet where you have 65% chance of winning but you will probably rethink your choice if you have the option of taking this bet a 100 times. This is the underlying concept behind broad framing. You can view life as a series of theoretically profitable bets in which it makes sense to go for it, rather than to sit on the sidelines. Looking at bets piecemeal is narrow framing and taking a more aggregate overview of things is broad framing. If you find yourself answering binary questions (whether we do x or y), you have to realise that you are framing the options too narrowly and could instead rethink about the overall objective vs thinking about the options presented to you.
This is why it is advisable to not look at your financial portfolio every day or week. In a study, it was found that passive investors who only looked at their portfolio once a few months were found to be more profitable than their active counterparts. The short term losses end up triggering loss aversion when in reality, you will come out richer if you take an aggregate look, maybe once a quarter. Board framing also dictates not going for extended warranties and choosing the highest deductibles on insurance. One of the more common practical implications of narrow framing is individual project managers in an organization being risk-averse as their own individual success is linked to their own projects but the CEO of the company may want all project managers to take more risks to increase overall success. To put it simply, internalize that you win some and lose some and don’t sweat the individual outcomes.
There are two distinct ways in which we experience events. The experiential part, which involves the actual feelings associated with the event, the enjoyment, the distress, the joy, the misery, etc. The remembering part, which is dependent on what and how our brain chooses to deposit in memory. This difference between experiencing something and how we retrieve it from memory once the event is over is very counter-intuitive and it is very interesting to see how the brain works.
We follow the concept of peak-ends, which is that we remember the peak emotions of the experience along with how the event ends. The average of these two emotions is how the event gets memorized. When people undergoing painful medical procedures were studied to see how they perceived their experiences, it was observed that the duration of the procedure played no role in their recall of the experience. This is such an incredible finding. Instead of the amount of time a person spent in the procedure, the peak discomfort along with how things ended, dictated how people perceived their experience. This has so many applications to how you can design end-user experiences. Don’t focus on getting the hairy part of things done fastest, instead focus on keeping the worst aspect of the experience manageable while ensuring people have a terrific end.
That’s all folks! This is an exceptional book with so much practical knowledge and implications. I cannot recommend it enough. I hope this post and it’s part one should inspire you to pick it up.
I run a startup called Harmonize. We are hiring and if you’re looking for an exciting startup journey, please write to jobs@harmonizehq.com. Apart from this blog, I tweet about startup life and practical wisdom in books.