Swiss author Phil Rosenzweig talks about two modes in which our brain operates: deliberation and implementation. The process of deliberation is for carefully considering options and their outcomes. Pros and cons are weighed, the best and worst outcomes are sized up and a decision is made. With a decision made, the process of implementation is when you stop deliberating, focus on the tasks and get them done. Rosenzweig offers that the two modes are divided into the two sides of the brain: left and right.
The functions of the left side of the brain are as follows.
- If a decision is to be made in a complex setting, the the left brain evaluates what we can control and what we can’t. E.g. in a game of cricket, swinging the bat to hit the ball and rotating your arm to bowl a ball is well within your control, but the result of the game involving 22 players and the weather are not.
- The left brain also evaluates if the success of the decision depends on whether performance is absolute or relative, i.e. is success simply reached by reaching a benchmark, say 100 push-ups or is it in competition with others, e.g. bettering the 150 push-ups done by your gym partner.
- The left brain also carefully ponders and decides whether to act and fail or not act and miss. E.g. ‘act and fail’ is if you invest in a stock with a stop-loss. When the stop-loss is reached, you exit the stock having lost some money. However ‘not act and miss’ is when you refuse to travel to Kenya fearing catching a local disease and then missing out on watching zebras in the wild.
- The left brain evaluates if the beneficiary and victim of a decision is just you or an entire group of people.
- The left brain considers a set of proven models to try and evaluate options in an unbiased, rational and detached manner, using numbers and probabilities. E.g. choosing one stock over another can be evaluated using a model called CAGR (Compounded Annual Growth Rate).
When all is said and done, it is the function of the right brain to take charge and get things done. For that purpose, the right-brain controls the following faculties.
- Mustering confidence, even if it the feeling is excessive, such as overestimation. Without supreme confidence, you may stall or second-guess the decision taken by the left brain.
- The right-brain also seeks to perform beyond the unknown. E.g. when all models are exhausted and all options evaluated, there are situations when a decision wanders into a situation where few people have been before. The right brain seeks creative answers here. E.g. Sustainable energy through wind and solar means with the same scale as fossil fuel.
- The right-brain responsible for leading, inspiring and motivating peers and get things done in a group.
Why understand the brain
The book helps us understand how our brain works so that we can be aware and improve our decision-making abilities.
Here are some things that we need to understand in the process of decision-making.
What is in control and what is not
To be able to give your best to a situation, you must be fully confident in what you can control. If something feels out of your control, then you will not be fully committed. E.g. while writing a blog post, it is you who can control that it can be done by the weekend, so that it is ready to be taken live.
But at the same time, You must let go of what you cannot control, otherwise you will be frustrated when the outcome doesn’t go your way. You cannot control how many people read, like or share your blog post. It depends on factors out of your control, such as the algorithm of the social network where you share your post, intentions of other people and the popularity of the content of the post.
Control: Direct, none and indirect
Based on the situation, the control you can exert may be none, direct or indirect. E.g. when you apply for a loan, the only thing you have DIRECT control on is to fill up the application and make sure that the relevant documents are attached and valid. You have ABSOLUTELY NO control on whether the bank will indeed approve your loan. But, the chances of the bank sanctioning depends on some things you can directly control. E.g. if you have been paying past loans and credit card dues diligently and promptly, then your credit rating goes up. You have INDIRECT control over whether the bank will consider your loan application more seriously than if your credit rating were bad.
The effects of rewards
Your decision-making alters drastically based on the difference between the rewards for the winners and the losers. This difference is called the payoff skew. Rosenzweig talks about three types of reward distributions or payoff skews.
Low skew: is when the difference in rewards among the winners is not highly skewed. In Europe’s top football leagues, the teams who finish within the top four make it to the continent’s elite event called the UEFA Champions League. Some teams visibly slack off as soon as they have reached the top four. They no longer try to win with huge margins and are sometimes happy to play out 0-0 or 1-1 draws simply to consolidate their position in the leader board. They stop taking risks and would rather not lose games. With a place assured in the next season’s continental top event, they care less about winning the trophy within their own country’s league. A low skew reward system punishes the losers less, so those already in winning positions start to play safe so that they consolidate their places. They do not care about reaching the top.
High skew: Contrast that with events where knockouts happen or medals are given. The difference is between in positions can mean winning gold or staying content with silver. As the skew between rewards increases, people get more competitive.
Winner takes all: Finally we have a winner-takes-all system, where ONLY the first-place party gets all the glory. Everyone else returns empty-handed. This is the highest form of reward skew. In the afore-mentioned elite European event, UEFA Champions League, ONLY the winning team gets to stand on the podium and raise the trophy in their hands amidst celebration. The losing finalist team members have to return to their locker room. The winning team is automatically guaranteed a place in the next season’s event, even if they don’t finish within the top four in their own country, but no such exceptions are made for the losing finalist. This is a situation where only the winner is considered. This causes fierce competition where the participants pull out all stops and go for the kill.
Is overconfidence real?
Rosenzweig argues that the word ‘overconfidence’ is a meaningless word. It is ONLY used in hindsight and never as a predictor or in the present. The same decision, when it leads to different outcomes, can be attributed to ‘overconfidence’ in case of failure, but ‘extreme courage’ in case of success. Instead of overconfidence, the author suggests the following errors in judgement.
- Over-precision: This is when you are too confident about your judgement. E.g., if someone asks you if India will win the cricket world cup and you say that the probability is 99%. Sure, India have a reasonably strong team and started the tournament strongly, but there are 3 – 4 realistic contenders for the trophy and on their day anyone could do well. So India’s mathematically realistic chance is only 25 – 30%.
- Overestimation: This is when you are too sure of your skills and believe that you can do more than you actually have in the past. E.g. I may believe that I can ride a motorbike for 400 km a day. But the maximum I have done is the past is 250 km. There has been no evidence that I can actually perform what I believe.
- Overplacement: This is when you believe that you are in the top 1 percentile among all the people with a certain skill. E.g. if you believe that you are the best singer in the room or that you are more beautiful / handsome than most of the people in a night club. The problem is that more than 90% are thinking the same. Of course it is impossible for 90% of the people to fit in the top 1%. So most people are overplacing.
How reliable are base rates?
A ‘base rate’ is a known / believed probability about the likelihood of the outcomes of an event. E.g., if you toss a coin, the base rate of the coin landing heads is 50%. Likewise for tails. A coin has only two sides. There is no way to botch up the probabilities or estimate incorrectly.
But events in life are not so simple. Instead of just two sides to the coin of life, there are several factors that influence outcomes. One outcome may be more likely than another if some conditions are changed. Also, the base rates for your own experience might be different from that of the entire system. E.g. you may always land up with rude Uber drivers even though the base rate of getting rude drivers in the entire Uber system might be just 7%.
The misunderstanding of base rates is what causes overprecision, overestimation and overplacement. There is no good solution for it. For some events, base rates might be readily available online or with authorities. E.g. out of 100 patients admitted for colon cancer, how many survive. But for most events, base rates are unknown or unpublished. E.g. out of 100 people who buy the physical copy of a book that helps improve your fitness, how many actually finish reading it and how many take action as suggested in the book?
The limitations of deliberate practice
Deliberate practice refers to practising the same thing again and again, measuring the results, improving and repeating the process. It is believed to improve your decision-making over time. However there are limitations. For deliberate practice to work, here are some conditions.
- The result happens immediately after action: In case of a billiards stroke, the cue ball strikes the target ball almost instantly and either drops into the hole or doesn’t. This is not the same for a major economic policy, where there is no immediate result. The effect may take half a decade to take over the entire country.
- Feedback is immediate: This is similar to point 1. If you cook a meal, you get meaningful feedback about the success of your action instantly. A simple taste test will tell you how your recipe turned out. This is valuable information on what to correct next time. This is not true for an interview. Your interviewer may tell you that they need a few days to get back. In the meantime, if you have another interview, you do not know what to do better than your last one.
- Order of events and actions is sequential: If you were to improve your football skills, you have only one ball to kick and one shot to attempt at one time. The result and the feedback from that kick can be used immediately for the next kick that happens AFTER the first kick. But that is not true with sales pitches. You may be entertaining multiple potential customers at the same time, with the results of one pitch not yet known.
- Performance is absolute: If your goal is to improve your marathon time from 1:13 to 1:00, you are taking about two of your own performances. If your goal is just to finish a marathon better than your last timing, then deliberate practice is good enough. But what if your goal is to win the marathon. Do you know how fast the winner’s timing should be. If it was 1:01 last year, how much would that person have improved this year? Will he run in 0:50? Deliberate practice falls short when you are aiming for relative performance against someone else.
The effectiveness of models
There are several mathematical and mental models to help predict where an event will go. Stock market is rife with such models. A humungous amount of calculated indicators are used to predict the direction of the market.
Models are good when you want to predict the outcome of an event that is not in your direct control. E.g. where the market will move based on its indicators or how good a football team will do based on the players chosen in their lineup. But they are meaningless when you are the person who has to take action next. You cannot think about ‘rates of success’ or ‘likelihood of failure’ when you are the doctor on the operating table, nor can you do it when a startup company with no track record is approaching you for investment. You just HAVE TO muster the confidence in your success.
Beware of winner’s curse
Sometimes, a large company outbids other large competitors to take over a lucrative business. They do so by paying a humongous sum of money in the process to stay ahead of competition. But soon, all that lost money comes back to bite the company and they soon lose their way and go bankrupt.
In tennis, too often, two players slog it out in a five-setter semi-final and run themselves ragged. The winner, even though he/she wins the semi-final, usually is thrashed in the final by a fresher opponent. Sometimes players pick up injuries that derail their entire season.
This is called the winner’s curse. Sometimes winning takes its toll. You need to know the right time to back away and walk out of fierce competition. Instead of getting caught up in the heat, it may be necessary to walk away or at least slow down, let the opponent get an advantage and then strike back when you have the opportunity.
The anatomy of a good decision
Summing up everything, Rosenzweig suggests the following questions before you arrive at a decision.
- Can it influence outcomes?
- Is rapid feedback available?
- Is it for self or group?
- Is it overconfident?
- Have we considered base rates?
- Are the models used sufficient?
- Should I act and fail or not act and miss?
The author likens the process of decision making to the roles of :
- Tactician: Knowing the outcomes, their benefits and their costs.
- Psychologist: Knowing that you are not victim to biases and irrationalities.
- Gambler: With all said and done, you need to summon the guts and take responsibility for a decision and its consequences.
Decision making is complex process. You can never be 100% correct. But by slowing down and thinking about decision making can help you arrive at good solutions.
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