The Psychology Behind Our Decisions.

Understanding how your brain tricks you.

This article is dedicated to the memory of Dr. Daniel Kahneman, a leading psychologist of our time and Nobel laureate, who passed away last week on March 30, 2024.

I must begin with a small confession: this article should have been published by the end of March, but I have become a victim of procrastination. Today, I have decided to write about the philosophy of decision-making, focusing on the many fallacies and biases involved. I dedicate this article to the memory of the greatest psychologist of our time, Daniel Kahneman, who passed away last Saturday. Daniel, the Nobel laureate in economics in 2002 (there is no Nobel Prize for psychology), is without a doubt a revolutionary thinker in the field of behavioral economics and the whole idea of decision-making.

For many years, we have focused on the influence of our thoughts, dedicating entire studies and research to understanding them. We know that the things we watch, read, and the people we hang out with heavily influence our decisions. But have we discussed the biases that affect our decisions? We are not as rational as we think we are; we are not simple robots. This might not be a comforting message for economists who pride themselves on rationality.

Indeed, the prefrontal cortex (the thinking brain) is the greatest gift of evolution. It’s a common fact that we still have not been able to understand fully how the brain works, but research in this area continues. However, this highly evolved brain is often prone to simple mistakes and laziness. In his work, Daniel Kahneman analyzes that the brain has two systems: System 1 and System 2.

For example, to compute 2+2 you will use your automatic system (system 1) but for more complex problems like 98×47 you will need your system 2.

System 1 is automatic, uncontrolled, fast, unconscious, and effortless. System 2, on the other hand, is controlled, effortful, slow, self-aware, deductive, and lazy. Think of System 2 as a boss who stays in the office and only comes to assist when requested. Many of our decisions are a product of System 1 of the brain, which comprises many biases. There are numerous biases that exist, but I will discuss only a few of them.

Narrow Framing phenomenon

The truth is, in many cases, we think we are focusing on the future, but often, our decisions respond to present circumstances with little consideration for the future. Let’s examine your day today, the decisions you have made, and how they relate to your Desired Future State (DFS). Consider this example.

If you want to avoid lifestyle diseases it would be more practical to eat healthily this morning and definitely skip that McDonalds run.

We know that understanding our attachment styles can lead to better relationships, yet we often fail to do so. It’s not that we are oblivious to the fact that everything matters, but we don’t always remember this in everything we do. Perhaps next time, consider your Desired Future State whenever you are making decisions, although achieving absolute consistency in this is impossible.

How do your relationships relate to your DFS?

What mistakes/habits are you making that would affect your DFS?

Sunk Cost Fallacy

If you are a student of economics, business management, or finance, you have probably encountered the term “sunk cost fallacy” – the phenomenon where a person is reluctant to abandon a strategy or course of action because they have invested heavily in it, even when abandonment would be more beneficial. This is why people often stay in unhappy marriages, poor jobs, and unpromising research projects. We can all think of a relationship where we failed to act even when everything indicated that we should.

When we have invested too much in a relationship, a course, or any other project, we find it hard to let go. In rational thinking, if something is not working, we should cut our losses and move on. However, often, that’s not the case. According to the Loss Aversion theory, we tend to deal with losses harder than wins – the emotional cost of losing $100 can be equated to winning $200.

Take some time today to sit down with yourself and ask what aspect of your life you are putting too much time and effort into, even though everything proves retrogressive. It’s important to count your losses and move on. Psychologist Daniel Gilbert writes that sometimes we are afraid of making decisions because of the fear of regret we will experience, forgetting the psychological defenses that exist in us – our psychological immune system.

The Availability bias

In his book “Nudge,” Nobel laureate in Economics 2017, Richard H. Thaler, asks a thought-provoking question: in the United States, are there more gun deaths caused by homicides or suicides? Surprisingly, a higher percentage of people answer homicide than suicide. This is likely due to the fact that homicides receive much more media coverage than suicides – in fact, double the coverage.

When our news is filled with details of recent earthquakes, femicides, and other tragedies, we tend to believe that these issues are much more prevalent than they actually are, leading us to think that resources should be diverted to address them.

People who have experienced bad and toxic relationships are more likely to believe that all relationships are energy-draining and ultimately worthless. Similarly, someone who has lost their wealth through a bad divorce may develop a negative view of relationships. However, when we expose ourselves to more data, such as through books, we are confronted with a broader picture of different situations.

The truth is, more than half of marriages end in divorce, and there are unfortunately cases where couples harm each other. Yet, on the day of marriage, it would be unimaginable to think of such outcomes. Therefore, it’s important to realize that your relationship is not as bad as you may think, nor is it as great as you may think. So, don’t beat yourself up, but also don’t let your guard down.

Hedonic treadmill and Novelty

More often than not, we tend to believe that acquiring certain things like a job, a car, a house, or even a relationship will make us happy. We think that the latest iPhone, a dream vacation, or a new relationship will bring us lasting happiness. However, we soon realize that these things only provide temporary satisfaction, and we end up feeling empty shortly after.

This phenomenon is illustrated in a famous graph by Andrew Clark, Ed Diener, and Yannis Georgellis of the German Socio-Economic Panel, which shows that newlyweds report high life satisfaction, but over time, it declines. The idea of “retail therapy” is a result of using novelty to try to fill an inner void. Just take a look at your garage – all that clutter, why did you buy it?

I often ask my girlfriend why she bought certain products, and the common answer is “I just felt like it,” or “it makes me feel nice.” These are obviously irrational decisions that many of us make. Before you make that purchase or indulge in retail therapy, remember that it won’t fill your void. In simple terms, you will still feel the same sadness as before. As Adam Sandler humorously portrayed in a skit on SNL, if you are sad in New York, you will still be sad on vacation in Italy. So, stop trying to fill your inner void with material possessions or new relationships.

Overconfidence and optimism.

Many people tend to overestimate their abilities in various areas. They believe they are better drivers, funnier, and smarter than the average person. However, the reality is often different. For example, more than 60% of new businesses fail within a few years, and more than half of marriages end in divorce. Despite these statistics, new entrepreneurs and newlyweds often find it impossible to imagine failure. They are confident that their new project or relationship will be a success. Before making such big decisions, it’s important to consider the data in the area. I once wrote an article titled “Relax, You Know Nothing,” which emphasized that the more you read, the more you realize how much you are unaware of.

For instance, if you are considering starting a new relationship, take the time to sit down and consider your weaknesses, attachment styles, unhealed aspects, ego, and self-esteem, and ask yourself how they might affect your relationship. In business, it’s crucial to understand the industry and be prepared to remain strong through the inevitable lows and meltdowns.

I have worked with many people in leadership roles, and I’ve found that many think they have what it takes to lead people until they are actually in the position. As Franklin D. Roosevelt said, “It is not the critic who counts; not the man who points out how the strong man stumbles, or where the doer of deeds could have done them better. The credit belongs to the man who is in the arena, whose face is marred by dust and sweat and blood…”

There are many biases that I can name in a blog but let me leave you with the five I have listed above. I hope next time when you are thinking of new project, job, relationship you will consider the above biases.

Narrow Framing – How does this decision align with my desired future state versus my current situation? I really want to buy a new phone, but that would mean I will fall short of my dream vacation at the end of the year.

Sunk Cost Fallacy – Am I afraid of letting go of this relationship because I have invested too much time in it, even though they don’t respect me? Do I think if I keep showing up, they will realize my worth?

Availability Bias – Are my opinions and feelings towards certain jobs, relationships, and situations based on past experiences?

Hedonic Treadmill – Do I use shopping therapy when I am sad? Did I buy this phone out of emotional conviction rather than a rational one?

Overconfidence and Optimism – How do my attachment style, ego, and other factors limit my success in long-term relationships? What is the success rate of businesses in Sydney? Do I really have what it takes to take on a leadership role?

Looking forward to part 2, and I’ll be returning to my political desk very soon; a lot has been happening in the political spectrum.