Decision Making Series Part II:
In our first article on decision-making under uncertainty, we delve into various theories, insights, and anomalies in the human decision-making process. Decisions accompany our daily work in IT. Whether fundamental architectural decisions, the selection of various technologies, or tricky situations in offer management. In decision theory, a distinction is made between normative and descriptive approaches. Normative approaches are mainly found in economics. They try to explain how we can make optimal decisions. Descriptive approaches explore how people actually make decisions.
For a long time, people have been trying to make more optimal decisions using statistics. But no matter how many calculations we perform with masses of data, the world remains a complex and partly unpredictable environment where we have to make decisions daily. Purely rational decisions are based on reason and logic. But we almost always make decisions in the context of bounded rationality. Knowledge, time, and computational power are limited. Therefore, a person makes decisions that are more satisfactory than optimal. To make a satisfactory decision within a reasonable time in uncertain situations, we must use techniques beyond complex calculations.
People have an adaptive toolbox – a set of heuristics – from which they can draw.1 A heuristic is a process or method that requires less information, calculations, and time by ignoring part of the information. To optimize the decision with these means, it is important to choose the right tool for the respective decision. Here we speak of ecological rationality. We adapt our decision strategy to the environment. Under conditions of bounded rationality due to uncertainty, we resort to various quick and computationally light heuristics. Below we would like to introduce you to some heuristics that accompany us daily in our decision-making:
Tallying
Tallying, or the linear unit-weight model, suggests that to estimate a criterion, you don’t estimate weights but simply add up the number of positive indicators. Imagine you are comparing two frameworks for use in your software based on several criteria. For each criterion and framework, you give a plus or minus. In the end, you just need to add up which of the two frameworks meets more of the intended criteria.
Take-The-Best Heuristic
Here, the decision about which option among several is the best is made solely based on one feature or characteristic. Imagine you are at a party and they have a candy bar. For health reasons you decided to just eat one candy per day. All candy bars have different characteristics. They differ in sugar content, calories and size. Since you can only have one candy bar, it should be worthwhile and last as long as possible. You therefore decide to just go by the size and pick the biggest one.
Satisficing
Next, we have satisficing.2 We look for alternatives and choose the first one that exceeds our requirements. Imagine you want to hire a new developer because this position must be filled in a project. You don’t look at all available applicants on the market but choose the first one who is “good enough” and exceeds your requirements. If we then invited more applicants, we could no longer justify the time and cost of further interviews, even if there might be an even better applicant on the market.
Imitate the Successful
Each of us must learn and gain experience from scratch. But not every person has to make the same mistakes at least once. We observe and learn. With this heuristic, we particularly pay attention to the most successful person and mimic their behavior. This is also a driving force in cultural evolution. To lead a project to success, we could look at projects from the past and analyze what exactly was done and what decisions were made that might have been crucial for success.
Tit-for-Tat3
A well-known example is the prisoner’s dilemma.4 It represents a situation where two parties, separated and unable to communicate, must decide whether to cooperate with the other party – in this case, the police – or not. The two prisoners are presented with three scenarios and must decide whether to confess to the crime or not:
- Prisoner 1 remains silent, Prisoner 2 confesses: seven years (Prisoner 1), zero years (Prisoner 2)
- Prisoner 1 confesses, Prisoner 2 confesses: five years imprisonment for both
- Prisoner 1 remains silent, Prisoner 2 also remains silent: three years imprisonment for both
The highest reward for each party occurs if both parties decide to cooperate. Only if both parties cooperatively remain silent and both accept the three years of imprisonment as a lesser punishment do both parties get a relatively good deal. This behavior can also be observed in the trade market, for example, when it comes to tariffs in international relations and business negotiations. It can have advantages in decisions regarding negotiations with customers or business partners.
Default-Heuristic
Doing nothing is also a decision, as the default heuristic suggests. If there is a preset, you should do nothing. The default is assumed to be the “safe” alternative and requires no further energy expenditure. This explains, for example, the different organ donation rates in countries where donation is standardly provided and in countries where one must actively act to become a donor.5 It is particularly important to set solid company-wide standards to fall back on by default. For example, a standard technology stack. It is important not to choose the default just because you want to avoid decisions or invest time in further research. Always relying on the well-known relational database management system, even though you are not completely satisfied and there are now new, cheaper, and more comfortable solutions on the market that could save time and costs, can also be disadvantageous.
Our adaptive toolbox holds many more heuristics for us. Heuristics are not the second-best choice. Optimization is not always better. We don’t only use heuristics simply because of limited cognitive resources. People can rely on heuristics for more than just unimportant routine decisions.6 It is okay to use heuristics for important decisions in our daily work. We already do this successfully every day.
Sources
- Risk, Uncertainty and Heursitics, 2013, S. Mousavi & G. Gigerenzer, Johns Hopkins Carey Business School, Washington, USA, Center for Adaptive Behavior and Cognition, Max Planck Institute for Human Development, Lentzeallee 94, 14195 Berlin, Germany ↩︎
- https://wirtschaftslexikon.gabler.de/definition/satisficing-45748 ↩︎
- https://www.spektrum.de/lexikon/neurowissenschaft/tit-for-tat/12995 ↩︎
- https://plato.stanford.edu/entries/prisoner-dilemma/ ↩︎
- The default heuristic in strategic decision making: When is it optimal to choose the default without investing in information search?, Ofer H. Azar, Journal of Business Research, Volume 67, Issue 8, 2014, Pages 1744-1748, ISSN 0148-2963, https://doi.org/10.1016/j.jbusres.2014.02.021. ↩︎
- Brighton H, Gigerenzer G. Homo Heuristicus: Less-is-More Effects in Adaptive Cognition. Malays J Med Sci. 2012 Oct;19(4):6-16. PMID: 23613644; PMCID: PMC3629675. ↩︎