I am an idiot.
I know this because people like to tell me every day — sometimes more than once if I’m coming off unreasonably erudite, which is, unfortunately, more often than I’d like.
But, all you accomplished, degree-hoarding, corporate executives who have made it to some of the most prestigious positions in business, here’s the thing: you’re pretty stupid too. Some of you are more stupid than you’d like to admit.
I’ve got legit evidence to back this up. I’m saying that, yes, most executives are not as smart as they think you are. No one is. And it’s time to start realizing the times when you’ve let your stupidity get the best of you, especially when you’re making “gut” decisions in the course of running your business.
I first discovered how stupid we human thinkers are about two years ago. It was then that I stumbled upon the 2011 book “Thinking, Fast and Slow” by renowned psychologist and Nobel laureate Daniel Kahneman. The book is one of my absolute favorites.
I’m reminded of its greatness this week because famed financial writer Michael Lewis — author of “Moneyball” and “The Big Short,” among others — recently released his latest work, “The Undoing Project,” which is a portrait of Kahneman’s relationship with his research partner, the late Amos Tversky.
This relationship is arguably one of the most important in modern psychological and economic history. Many of Kahneman and Tversky’s most influential findings have played a substantial role in the development of the field of behavioral economics.
“Thinking, Fast and Slow” is essentially Kahneman’s telling of some of the pair’s most fascinating discoveries about human thought — namely that we are generally irrational, overconfident thinkers whose intuition is often wrong, leading us to make poor decisions.
According to the book, the human brain is driven by two distinct systems. System 1 is fast, intuitive and emotional; System 2 is slower, more deliberative and more logical. The two systems shape our judgments in untold ways. And as Kahneman writes, more often than not, we overwhelmingly rely on System 1, our fast-thinking, emotional intuition. This leads us to become overconfident decision-makers, almost unknowingly making choices against our own self-interest.
One example is the concept of loss aversion, which Kahneman and Tversky coined through their work. It essentially means that humans are more likely to want to avoid losses than acquire gains. Take the stock market. The pain of a dramatic stock market decline is likely to lead most System 1 thinkers to avoid the pain of further losses by liquidating their remaining holdings in defense. However, someone with a more logical and thoughtful understanding of the stock market might instead treat the broad price decline as a discounted buying opportunity for when the market recovers later. In other words, it’s better not to lose $5 than to find $5.
Moreover, consider the concept of psychological framing, another significant finding from Kahneman and Tversky’s research. When subjects in an experiment were asked whether they would opt for surgery if the “survival” rate was 90 percent, while others were told that the “mortality” rate is 10 percent, the first framing received increased acceptance even though the options are exactly the same. Again, this is System 1 thinking at work.
Business leaders aren’t shielded from System 1 thinking. In fact, based on the number of decisions executives need to make every day, it’s more likely than not that they rely on their intuition for a lot of critical decisions. Add in the speed of business and the increased noise enveloping around them, and it makes for a pretty hectic environment for business leaders to be able to avoid such faulty thinking.
Yes, there are a lot of executives that have welcomed the arrival of evidence and data to lead their decision-making. But, as Kahneman and Tversky’s work eagerly points out, even data is collected and assembled in faulty ways.
Ever since I read “Thinking, Fast and Slow,” I’ve tried to ensure that the most critical decisions I make are driven by my more intuitive, logical train of thought. Do I still make some pretty stupid, intuitive, System 1 decisions? You bet.
But, hopefully, thanks to the work of Kahneman and Tversky — and Lewis’ recent telling of their influential relationship — business leaders can be more self-aware about their flawed tendencies and do the best they can to ensure their System 2 thinking is on display when it counts the most.
Frank Kalman is Talent Economy’s Managing Editor.Filed under: Talent EconomyTagged with: Amos Tversky, Daniel Kahneman, decision-making, executive, Fast and Slow, leadership, management, Michael Lewis, The Undoing Project, Thinking