Making a Big Decision? Beware of Your Biases

By Frank-Jürgen Richter

Nikkei Asian Review, May 29, 2014

“We didn’t see it coming!” is the usual response to unintended consequences. We hope this excuse will ease our critics’ anger, but most of the time they just think we are uncaring or inept. Perhaps, we are simply poor at thinking things through. Which raises a question: How can policymakers and business leaders make better decisions?

We can trace the study of unintended consequences to Adam Smith. In the mid-1700s, he articulated the notion of an “invisible hand” capable of guiding our self-interested actions toward broadly beneficial outcomes.

Human flaw
Often this leads to what may be considered windfalls, but our errors can be costly, too. As Daniel Kahneman and Amos Tversky wrote in their paper “Prospect Theory,” “… we simply do not think things through. In fact we cannot, as we are too tied to several biases that cloud our decision-making.” Kahneman’s contributions to behavioral economics, which earned him a Nobel Prize, are centered on the idea that human reason is flawed, and that if we want to make smarter choices, we need to be aware of our biases.

Nassim Nicholas Taleb, author of “The Black Swan,” reminisces that he once failed to convince a group of financiers of their natural inability to make good decisions because they were blinded by their biases.

This worries me in a broad way. Almost half of the politicians in the U.S. are lawyers; they make laws of such complexity that only they may debate them. Once the majority of the Chinese Politburo were engineers; they would seek to make things work better, but did they stop to consider whether they were taking the right path? In France, many leaders come from the Ecole Nationale d’Administration; might they be too anchored in one mode of decision-making? Half of the CEOs of top French businesses are ENA graduates, too.

Consider the Sarbanes-Oxley anti-fraud law, enacted in the U.S. in 2002. Though it is relatively brief at 66 pages, the law was criticized for being too complex. Many complained that because it requires a separation of duties, the law forces companies to hire larger accounting teams.

That, in itself, may not be such a bad outcome. The real problem with the law was its failure to rescind earlier legislation. This was only compounded later, in 2010, with the 2,319-page Dodd-Frank act, with its complicated arguments and amendments of amendments.

All governments have bill drafters responsible for ensuring new rules jibe with or cancel out old ones. But when faced with more than 2,000 pages, who could blame them for a few errors? Who will point fingers at these guys — let alone the politicians themselves — when unintended consequences arrive?

In times of conflict, decisions obviously carry huge significance. On May 7, Valeriy Konovalyuk, a candidate for Ukraine’s presidency, challenged Russian President Vladimir Putin to a judo match — winner take all. It is not for me to judge the wisdom of this, but surely if such a medieval joust were to take place, there would be consequences.

Balancing act
If unintended outcomes are the result of a lack of clear, systemic distillation of the facts, what are we to do?

Open discussion of data and potential courses of action may lead to the realization that some decisions are simply too costly for society. But this may be so democratic that nothing is ever accomplished.

At the same time, many in society say they are uninterested in the process of government and wish for a quiet life. This means decision-makers have a responsibility to protect these people and think on their behalf. At the government level, we must not raise the stakes by indulging in tit-for-tat decisions, which only raise the potential for unintended consequences. And we cannot see decision-making as a zero-sum game, since those who lose will fight back ever more violently.

Everyone in society needs to stand back and be calmer about political decisions. The herd mentality can be as bad as despotic management. Theorists like Kahneman are adamant that we are individually illogical — stating that we ought to discuss before acting, and that we must open up our decision-making models for debate and experimentation.

I think every government must have itself carefully and independently monitored to control excesses. A regulator acts like a valve — blowing off steam if government becomes overheated, and presenting new ideas if it starts running out of intellectual fuel. Societies need this in order to develop in our globalized world.

Frank-Jürgen Richter is founder and chairman of Horasis, a global visions community.