ALLISON SPIELMAN ADVISORS
Cognitive Decision Making:
How Your Brain Can Fool You
January 29, 2013
Why Talk About Decision Making?
• It is what we do
• It can help you improve your life
Quiz
 In middle of page write down the
last 3 digits of your phone
number.
 Put a mark above or below if
you think Attila-the-Hun died
before or after the number you
wrote.
 Now write down the year that
you think Attila-the Hun died.
 Answer 453AD
Anchoring
• Richard Thaler
• Daniel Kahneman &
Amos Tversky
OTHER EXAMPLES
Mahatma Gandhi
Proportion of African countries in the United
Nations
IMPLICATIONS
Negotiations
Driving
Relationship
Fund Raising
Framing
Classic
Illustration:
Rare Asian
Disease
IMPLICATIONS
Lawyers influencing juries
Labor negotiations
Medical decision
REPRESENTATIVENESS
Tversky & Kahneman –
The Linda Problem
IMPLICATIONS
Jury decisions
HIV testing
OTHER HEURISTICS
Availability
Recency
Confirmation
Over-confidence
Loss Aversion
200 more by some estimates
POPULAR PRESS
 “Sway: The Irresistible Pull of Irrational Behavior” by Brafman &




Brafman (2008)
“Blind Spots: Why Smart People Do Dumb Things” by Van Hecke
(2007)
“Predictably Irrational: The Hidden Forces That Shape Our
Decisions” by Ariely (2008)
“Decision Traps: The Ten Barriers to Brilliant Decision Making” by
Russo & Schoemaker
“Everyday Irrationality: How Pseudo-Scientist, Lunatics, and the
Rest of Us Systematically Fail to Think Rationally” by Dawes
(2001)
So…Are we hopelessly irrational
decision makers?
GARY KLEIN
“What really happened is that Kahneman
and Tversky designed their studies to
demonstrate the limits of classical
decision theory, not the limits of their
subjects”
Two System Brain
SYSTEM 1
 Automatic
 Quick
 Little or no effort
 No sense of voluntary control
 Operates below our consciousness
(mostly)
SYSTEM 2
 Effortful
 Complex computations
 Choice
 Concentration
 Consciousness
Two System Brain
Synaptic Connections
DOPAMINE
 Produces good feelings
 Expectations
 Amplified - Cortex
EXAMPLES
 Iowa Gambling Task
 Lt Riley
IMPLICATIONS
 Fire Fighters
 Code Blue Emergencies
 Driving
Dopamine
EXAMPLES
 Yale Undergrads vs. Lab Rats
 Apple iPods
IMPLICATIONS
 Stock Investing
 Investment Bubbles
Interaction Between
System 1 and System 2
Shopping Choices
Making Shopping Decisions
APPLICATIONS –
COGNITIVE BIASES
 Control the data
 Know when you are susceptible
APPLICATIONS – SYSTEM
1 OR SYSTEM 2
 Less Important – System 2
 More Important – System 1
 Predictable Patterns – System 2 (maybe)
 Random Patterns – System 1
 Puzzles vs. Mysteries
APPLICATIONS –
IMPROVING DECISIONS
 Embrace Uncertainty
 Focus on Errors
 THINK ABOUT THINKING
OVER-COMING ERRORS
 Start with realistic anchors – GIGO
 Build expertise
 Put Judgments into perspective
 Represent data in a more usable
fashion
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January 2013 – “Cognitive Decision Making”