How to Make Good Decisions in Conditions of Uncertainty

How to Make Good Decisions in Conditions of Uncertainty

I was recently reading the book Thinking Fast and Slow by Daniel Kahneman who’s theory is Prospect Theory, for which he won the Nobel Prize in Economic Sciences in 2002. The theory focuses on how humans make decisions when facing risk, particularly financial risk. As it turns out the ability to make good decisions on a consistent basis is the number one skillset anyone can possess. This skill can be learned!

Ironically, Kahneman is a psychologist who won the Nobel Prize in an area of Economic Sciences. He was awarded the prize for his research on decision-making in conditions of uncertainty.

If you you can learn how to make good decisions in conditions of uncertainty, then you can catapult your business and lifestyle significantly.

Kahneman alludes further in this work about human behavior in the realm of intuitive thinking or fast thinking, and when we should instead use our capabilities of slow and more analytical thinking. This may seem like common sense, yet to the untrained mind, the multitude of distractions and attention grabbers we all face on a daily basis can unfortunately distort our thinking, putting us into a bad position to make decisions in our complex world.

If we are well educated on a particular subject or task, then we are much more likely to make good decisions using intuitive heuristics.

The purpose of this article is to help you make better and more accurate decisions, both professionally and personally, and give insight on what it takes to make decisions more efficiently.

What we need to be careful of when faced with a difficult question is the fact that we often involuntarily scoff over the question and answer an easier one instead, usually without noticing the substitution. This is dangerous.

What Are Intuitive Heuristics?

Intuitive heuristics are mental shortcuts that allow people to make decisions more efficiently. These rule-of-thumb strategies help us solve problems and make judgments quickly without constantly analyzing every detail. Here’s what you can learn about them:

  1. Definition and Purpose:
    • Heuristics are intuitive forms of reasoning that operate under conditions of uncertainty.
    • They rapidly produce generally adequate decisions, solutions, predictions, or inferences.
    • Heuristics help us function without constantly stopping to think about our next course of action.
  2. History and Origins:
    • Nobel-prize winning economist and cognitive psychologist Herbert Simon introduced the concept of heuristics in psychology in the 1950s.
    • He suggested that while people strive for rational choices, human judgment is subject to cognitive limitations.
    • Tversky and Kahneman’s work further explored heuristics and specific ways of thinking that simplify decision-making.
  3. How Heuristics Are Used:
    • Attribute Substitution: People substitute simpler but related questions for complex ones.
    • Effort Reduction: Heuristics reduce mental effort required for choices and decisions.
    • Fast and Frugal: Heuristics can be fast and correct in certain contexts.
  4. Benefits and Drawbacks:
    • Benefits: Heuristics allow quick problem-solving and decision-making.
    • Drawbacks: They can lead to cognitive biases. Becoming aware of this helps make better decisions.

I wrote an article that I turned into a Newsletter about cognitive biases entitled Understanding How Our Minds Can Lead Us Astray. In the article I focus on what are known as The 25 Cognitive Biases and by understanding and utilizing that psychological thought system can lead to greater wisdom. Combining them with this knowledge of intuitive heuristics can expand your capabilities for more optimized decision making, something most everyone can use.

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Created by Martin Hamilton