Emotional Decision-Making

The Peter Principle says that workers are promoted through the ranks until they reach a position they are incompetent in. Essentially, this is because promotions are based on meeting a standard, something that is often suddenly recognized by a manager. In all probability, performance will decline slightly after this deservedly-noticed peak, making it look like the promotion was to a level of incompetence. Marginal Revolution says that this is because recent activities are overrated when making promotion decisions, though usually not undeservedly so.

In other words, firms know that you sometimes get lucky, and they set the promotion bar high on purpose. After your promotion you experience a “regression toward the mean”, and your observed performance declines in quality, relative to your promotion-winning triumphs. But on average the promotions are still deserved.

A series of speeches by Dodgers GM Paul DePodesta (1, 2) recently brought to my attention also explore a similar topic. His major point is that many baseball decisions are made subjectively on bad data. The recency effect plays a role here too…

There was one pitcher that we particularly liked, but everybody said he was going to be a top ten pick. So we weren’t expecting to get him, and the Saturday before the draft in the regionals of the College World Series, he had a terrible outing…even our scouts began to panic a little bit, and said, “Maybe there’s something wrong with this guy and maybe we don’t like him.”…I was sitting there thinking, “Excellent, I hope he gets crushed every time he goes out there!” Because I know scouts from all the other teams were there watching.

Let’s assign a value to this recency effect. Certainly it should be considered in a stronger light because it may be indicative of a trend…but a study found that the recency effect results in doubling the expected value of a decision.

Just as in the “hot hands” belief in basketball, we find that even when subjects are explicitly told that the rates of return are drawn randomly and independently over time from a given distribution, they still assign a relatively large decision weight to the most recent observations – approximately double the weight of the other observations.

The Innovator’s Dilemma is a book by Clayton Christenson about how once-successful companies fail to adapt to changing markets. It usually happens because they latch on too hard to their successful innovation. Christenson’s first example is from the early hard drive industry:

Their failure resulted from delay in making the strategic commitment to enter the emerging market in which the 8-inch drives initially could be sold. Interviews with marketing and engineering executives close to these companies suggest that the established 14-inch drive manufacturers were held captive by customers. Mainframe computer manufacturers did not need an 8-inch drive. In fact, they explicitly did not want it: they wanted drives with increased capacity at a lower cost per megabyte. The 14-inch drive manufacturers were listening and responding to their established customers.

The Onion had a humorous take on the innovator’s dilemma, in their faux editorial, “F%&# Everything, We’re Doing Five Blades” (temporarily available here). It imagines the Gillette CEO’s response to Schick upping their razors to 4 blades from Gillette’s 3, a move they combined with perhaps the most inane television commercial script I’ve seen…here’s an excerpt from the Onion editorial:

Would someone tell me how this happened? We were the…vanguard of shaving in this country. The Gillette Mach3 was the razor to own. Then the other guy came out with a three-blade razor. Were we scared? Hell, no. Because we hit back with a little thing called the Mach3Turbo. That’s three blades and an aloe strip. For moisture. But you know what happened next…[the competition] went to four blades. Now we’re standing around…selling three blades and a strip. Moisture or no, suddenly we’re the chumps. Well, f*** it. We’re going to five blades.

What’s the common thread? In each of these situations, decisionmakers let their emotions overrule their objectivity. They fell in love with their past success and refused to admit that what they had was simply a temporary lead on the competition, or worse, dumb luck:

What accounts for success and failure? More often than you might think, it’s just luck. But like most things, luck can be managed…Every time you launch a product or service, every time you apply for a job or start a nonprofit, you’re either going to hit or not. If you get lucky, you’re entitled to deny that luck had anything to do with it. But if you fail–and you probably will–understanding the role of the L factor will keep you sane.

Another example of emotional decision-making is pointed out with people who buy SUVs by Malcolm Gladwell. He points out that many of the “safety features” that SUV makers tout are just designed to appeal to what French cultural anthropologist G. Clotaire Rapaille calls people’s deeper, “reptilian” responses.

“The No. 1 feeling is that everything surrounding you should be round and soft, and should give,” Rapaille told me. “There should be air bags everywhere. Then there’s this notion that you need to be up high. That’s a contradiction, because the people who buy these S.U.V.s know at the cortex level that if you are high there is more chance of a rollover. But at the reptilian level they think that if I am bigger and taller I’m safer.

A similar decision was made by the makers of the Chrysler PT Cruiser, who decided to reduce the size of the rear window because drivers were afraid of people being able to see in–not caring that it made it much more difficult to see out as well…Gladwell concludes:

But that’s the puzzle of what has happened to the automobile world: feeling safe has become more important than actually being safe.

Similar to DePodesta, Gladwell goes looking for the statistics that really mean something–the ones that translate into lives saved, not better numbers in a crash test. He finds that building a fortress around yourself is only half the problem–the other half is avoiding things on the road in the first place. And many of the fortesses’ reinforcements are making that part harder:

Bringing five thousand pounds of rubber and steel to a sudden stop involves lots of lurching, screeching, and protesting. The first time, the TrailBlazer took 146.2 feet to come to a halt, the second time 151.6 feet, and the third time 153.4 feet. The Boxster can come to a complete stop from sixty m.p.h. in about 124 feet. That’s a difference of about two car lengths, and it isn’t hard to imagine any number of scenarios where two car lengths could mean the difference between life and death.

Barry Glassner reached similar conclusions in The Culture of Fear. He argues that the torrent of fearful images from far away, displayed on television and in the media, often serve only to distract us from dangers that are closer to home but that we have done nothing about. For instance, paranoia about crack cocaine helps us forget that alcohol abuse has caused more pain and suffering than any other drug. But looking at the numbers is appealing to the cortex, and most of us make decisions in a more “reptilian” manner…

I’ve often felt that one of my most valuable gifts was knowing exactly the limits of my own intelligence. When I am absolutely sure of something to the point of becoming emotional about it, that tells me I’m probably wrong. Emotions are wonderful–just keep them out of my business decisions.