Curated from: strategy-business.com
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People are not accustomed to thinking hard. They are often satisfied with a plausible answer that comes quickly to mind.
The prospect theory - the empirical exploration of risk assessment, loss aversion, and reference dependence, explains why people consistently behave in ways that traditional economic theory could not predict.
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There are two thinking systems, each with distinct characteristics.
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In statistical thinking, professional statisticians informally think the degree of the probability distribution in a small group will closely resemble the probability distribution in the overall population.
In other words, even people who should know better make these mistakes. When they're not computing seriously in System 2 mode (reasoning), they rely on their intuitions for simple problems.
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The perception of and reaction to risk is often dismissed as emotional. The first thing that happens is you're afraid, and from that fear, you feel risk. So the view of risk is becoming less cognitive while emotion becomes dominant.
Emotion is about what might happen, not so much the probability. The more emotional the event is, the less sensible people are.
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Both individuals and groups need mechanisms to review how their decisions are made.
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Decision making can be divided into three systems: Emotional, rational, and perceptual systems.
The rational model is one where the beliefs and desires are supposed to be determined, but decision analysis of the last thirty years has shown that it doesn't work. Even people who are explicitly trained to used System 2 thinking (reasoning) in problems don't do so, even when they know they should.
It doesn't mean you shouldn't take decision analysis, just that decision analysis are not effective if decision-makers do not want to relinquish the intelligence function to somebody else.
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Decision analysis is based on the idea that decision making is a choice between gambles. Managers think that they are fighting risk in a controlled way. The idea that you are gambling is an admission that you have lost control. It is detestable to decision managers, and the reason they reject decision analysis.
It is advisable for organizations to dedicate some effort to study their own decision processes and their own mistakes, and to keep track so they can learn from those mistakes.
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