cliveharris

Deciding fast and slow

Blog Post created by cliveharris on Jul 5, 2017

The means by which we make decisions have fascinated researchers for generations. The Greek historian Herodotus was excited to discover, nearly 2500 years ago, of how the ancient Persians used to debate every decision twice – once when drunk, and once when sober – and if the two debates agreed, then the decision was passed. While no doubt fun for some, anyone who has ever regretted shopping on the internet while even slightly under the influence is going to be mildly skeptical of this approach.

 

Far more recently than Herodotus, in 2011, the celebrated behavioral economist Daniel Kahneman caused a near disturbance in the matrix with the publication of 'Thinking Fast and Slow' which assembled many of his years of psychology research into a form easily consumed by us ordinary people. As a pop-science title it was a best-seller, but it wasn't just a good story. It contained revelations about how we Earthlings arrive at decisions, and it taught us how to recognize, accommodate and compensate for mental traits that most likely evolved to suit our lives when we were hunter-gatherers. In a word - it was seminal.

 

This article describes a small fraction of the many rich findings in Kahneman's book, and goes on to explore how they might be interpreted in an organizational context, and in particular, if they can provide some insights in a world where organizations have the capability to automate many of their business decisions.

 

Both systems go

Try this mental arithmetic challenge - multiply 2 by 4. Now try this one - multiply 17 by 13. The second one was probably harder for you. What Kahneman reveals in his book is that these two tasks are not merely different by degree, rather - and perhaps counter-intuitively - they represent two different categories of thinking and of the processes by which we make decisions. He posits that this is an example of what in psychology is termed a dual-process model, which provides an account of how the same phenomenon can occur in two different ways.

 

Multiplying 2 by 4 probably took you close to zero effort. It was no doubt an automatic response and you didn't have to 'think' at all. This is the kind of mental processing that Kahneman refers to as System 1.

 

The second question probably took you a little effort. It is unlikely that you had an instinctive answer, and you probably had to hunker down a little and work it out. This kind of thinking is System 2 thinking.

 

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System 2 thinking increases necessary attention, therefore increasing time to a decision

 

System 1 is like a mental autopilot - always on, always ready to respond. It takes conscious effort to disengage System 1 and invoke System 2. System 1 is probably related to basic human responses like fight or flight - it aims to maximize survival, not, necessarily, success. There's no point in stopping to invoke System 2 to work things out when a sabre-toothed tiger fancies a bite.

 

This said, there probably was a time – perhaps when you were very young - when multiplying 2 by 4 wasn’t a System 1 activity – there was probably a time when you had to think about it. At some stage, this simple mental task and others like it seem to have made the transition from System 2 to System 1.

 

Further differences between the two modes of thinking are pretty startling. When you invoke System 2, there are some quite pronounced physiological changes. Your pupils dilate, your pulse quickens and you become insensitive to modest interruptions. It's probably not a million miles away from the state that software developers describe as flow. System 2 seems to reconfigure your body's limited resources (albeit in minor ways), consuming them slightly faster.

But what does it matter?

 

System 2 may well consume fractionally more of my body's resources, but I'm hardly likely to starve to death by overdoing it. For us people, it matters because by using the right system, we stand to benefit from better, faster decision-making, rather than from any resource surplus or deficit. But in organizations - where resources are often in the habit of being viewed through an accountant's lens - it matters because there's the potential for a second bite at the cherry. The resource costs of organizational decision-making can be incredibly high - think of the aggregated costs of employing people to individually meet and screen applicants for run-of-the-mill financial products. For organizations, reasoned, logical but expensive System 2 decisions have the potential to become automated System 1 decisions, and the payoff can be huge.

 

Right or wrong

System 1 thinking is absolutely necessary for us to engage with our lives - so much of what we do is effectively autonomous - but there are times when it’s a little too hasty. System 1 responses can be driven by instinct, resulting in the wrong answers, and Kahneman’s book contains many amusing examples of this. Indeed, part of Kahneman’s thesis is that we’d all become better decision makers if we took some time to assess which method is best in each situation (… in so doing, we push ourselves towards System 2).

 

So System 1 isn’t foolproof - if pressed to defend itself, it might proclaim “The perfect is the enemy of the good”. But for a business, there’s no point in rejecting a slow but good System 2 decision for a fast, automated, but poor System 1 decision. If you ever start making poor decisions at the speed of computers, your shareholders will soon want to know why.

 

Automating business decisions – or not

Some organizational decisions – perhaps rare or difficult decisions – are still a long way from becoming candidates for transitioning from System 2 to System 1. Think of a management team debating a proposed acquisition, or a major capital investment. Such decisions require analysis, logic, discourse and socializing throughout the organization. But for each rare or difficult decision, there are millions of other decisions capable of becoming System 1 decisions. Credit decisions are everyone’s go-to example of a decision domain that produces a high ROI and remains tractable with modern methods and tools.

 

Daniel Kahneman recognized the centrality of decisions in today’s organizations, describing an organization as ‘… a factory that manufactures judgments and decisions’. As a counterpoint, in his 2013 article Rethinking the Decision Factory in the Harvard Business Review, Roger L. Martin lamented that ‘Decision factories have arguably become corporate America’s largest cost’. Framed in the present discussion, it is clear that Martin was alluding to the costs of human-mediated System 2 decisions – essentially, the high cost of expert knowledge workers.

 

Since before the terms were even coined by Kahneman, many organizations have been genuinely engaged in a mission to transform their System 2 decisions into automated System 1 decisions. They may have not used this terminology, but the parallels are startling. It is as if the principle is central to the notion of automating decisions – whether they are human decisions or business decisions. For those that do it right, this is having a huge positive effect and helping to free their knowledge workers to concentrate on what they do best – innovate and help resolve the System 2 challenges that still defy automation.

 

Businesses across industries are automating their decisions with the FICO® Decision Management Suite. This suite processes data, utilizing advanced analytics, optimization, and decision management to quickly produce reliable, consistent decisions—moving businesses away from laborious System 2 processes.

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