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Fast and slow thinking
Kahneman calls them ‘System 1 and System 2 Thinking’. Here, System 1 is fast and intuitive and, thus, riddled with human biases. It shows up when you make an instant judgement that the new colleague looks ‘honest’ or the interviewer seemed ‘hostile’ from the beginning. On the other hand, System 2 thinking is slower, analytical and deliberate, where you consciously collect evidence, sift through facts, evaluate options and make a decision. Recognise that you have both the tools at your disposal and need to choose when to use each. To decide which career path or industry to pick, use System 2 thinking to research industries, job roles and skill requirements. Similarly, weigh pros and cons thoroughly while evaluating multiple job offers. On the other hand, use intuition for quick, low-cost or reversible decisions like volunteering for a short-term project or picking a team member to assist you on a task.
Anchoring
We rely excessively on the first piece of information we receive while making decisions. This becomes an anchor, rooting us to a spot, affecting how we perceive subsequent data and decide. Thus, if two colleagues have a disagreement, a third team member tends to believe the first person who complains. Similarly, the first impression of a candidate through his resume or first interview becomes an anchor for later evaluations. Be careful during project planning discussions, where the first budget or timeline estimate becomes an unrealistic anchor for expectations, leading to failure during execution. Also, while evaluating a market trend or a competitor, it is easy to be misled by initial data and make a wrong estimate, resulting in blunders and missed chances. Be aware that in performance appraisals, if your manager starts with criticism, you may become fixated and miss the overall positive picture. In sales, you can use anchoring effectively to set price expectations with the other party.
Endowment effect
We place a higher value on objects we own, compared to similar items that we do not own. This leads to the highest number of conflicts and sub-optimal decisions at work. As a team leader, you may hesitate to let go of an inefficient team mate. It may also become difficult for you to change your job or career in which you have invested time. On a daily basis, your team resists change and does not want to swap old processes and procedures for better options. Observe your managers and colleagues fight with misplaced ownership to retain team resources and equipment, even though they are needed elsewhere. Learn to recognise and let go where the endowment effect is hampering your organisation’s and your own interests.
Peak-end rule
Humans tend to judge an event or experience based on the most intense moment called the ‘peak’, and final moment called the ‘end’, instead of judging the entire experience as a whole. For instance, in annual appraisal, you and your manager may tend to remember the latest month (end) and the high performance or one terrible blunder (peak) during the entire year. To avoid this, learn to document results and performance on a monthly basis and use overall data during appraisal time. You can use the peak-end rule to plan your presentations and projects. Structure your communication to end a presentation on a positive note and emphasise key takeaways at the end. In a project, plan to end the project with momentum and celebratory success to leave a lasting impression.
Focusing illusion
“Nothing in life is as important as you think it is when you are thinking about it,” said Kahneman. The focusing illusion is the tendency to over-emphasise one aspect of a situation and neglect other factors. For example, a better job title may make you overlook the negatives of the new job offer, and vice versa. Similarly, one negative incident or bad team member can make you think about quitting your job, ignoring other benefits like rapid growth opportunities, job security or value of experience gained. While working on projects, it is easy to be misled by a singular focus on customer feedback or cutting costs, while ignoring critical factors like stakeholder interests, risk management and resource availability. Invite other opinions and perspectives to broaden your focus and to step out of your own focusing illusion.
Law of small numbers
We draw broad conclusions or make important judgements based on limited data or small sample sizes. So the ‘law of small numbers’ is about wrongly assuming a larger trend or pattern based on little information. For instance, lateral hiring decisions are made based on a few interviews without actual workplace observations. This leads to random bad and good hires. On the other hand, an intern converted into an employee after six months of observation has a better success rate. Similarly, both new projects and new employees are wrongly judged on the basis of initial mistakes. At the company level, a major strategic decision is made based on anecdotal evidence or one bad quarter in sales. Always question if adequate information and data is available to take a rational decision.
CHOOSING BETWEEN ALTERNATIVES
1.BEYOND REFERENCE POINT
Kahneman’s Nobel Prize citation highlighted the ‘prospect theory’, which shows that we use an internal reference point, instead of absolute numbers, for decisions. Thus, in a bad job market, an unemployed person may refuse a job where the salary is lower than that in his previous job (internal reference point). Don’t let your reference point stop you from evaluating current industry benchmarks.
2.‘I HATE LOSING’
We have a ‘loss aversion bias’ when we tend to go out of our way to avoid definite losses in the short term. So when you are changing roles or careers, you might refuse an opportunity where the salary offered is slightly lower than your current one even though your future career is likely to be much better. You would do better to look beyond shortterm loss in favour of longterm gains.
3.GUARANTEED ATTRACTION
We have a ‘certainty preference’ when our decisions are unduly influenced by guarantees and certainties over a better outcome carrying a slight risk. You might avoid asking for a fair price during a sale or a contract renewal for the perceived guarantee of renewing at the old price. Similarly, the comfort and guarantee of your existing job and team may keep you from trying elsewhere.
4.OVER-IMAGINED PROBABILITY
The opposite of certainty is the ‘probability effect’. We may give higher weightage to low probabilities and take unfavourable decisions. So, you may avoid the low probability of a rejection and not ask for a salary hike during appraisal. Conversely, you may join a startup with a tiny probability of earning 10x rewards. Are you giving higher weightage to low probability events?
(THE WRITER IS FOUNDER & CEO, SALARYNEXT.COM, A JOB LOSS ASSURANCE COMPANY)
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