As a manager, are the decisions you make rational? How much would you bet that they are or are not? Does your formulation of problems and objectives influence how rational the decisions of others will be? This book can help you check your answers.
The author, Daniel Kahneman has spent most of his professional life studying how people actually make decisions. His field is “behavioral economics.” This book is the capstone of a career that has deeply penetrated the processes of brain functioning and challenged classical economic assumptions. These led him to receive the Nobel Memorial Prize in Economic Sciences with Amos Tversky in 2002. The book is thorough, clearly written, and easily understood. It offers important lessons not only for economists, but especially for managers and for anyone who cares about the value of the decisions they make.
Many Managers are familiar with early insights of Herbert Simon, also a Noble Laureate, that alerted the economics world to some of the limits of rationality. For example, he observed that many successful managers frequently made decisions by “satisficing,” i.e. picking the first solution that meets a criterion rather than holding out for the optimal solution.
Here, Kahneman greatly expands on Simon’s work to include an even broader range of psychological and behavioral aspects of decision making. He shows how there are not only rational aspects to decision making, but other human features as well. His challenge to economic orthodoxy is that the situation in which the decision maker finds himself does matter, as well as how he feels about it, whether the issue involves a gain or a loss, how a question is presented, what it is compared to, and other characteristics of the issue’s formulation.
Essential factors of effective decision making such as “accessibility,” “broad and narrow framing,” “key heuristics,” “anchoring,” and “attribute substitution” are carefully spelled out. These constitute in part “prospect theory” for economics. A central conclusion is that there are essentially two modes of thinking, one rapid and more emotional, essentially intuition, and another, slower, more difficult and more analytical. Both have value, but the payoff for managers is to know the difference, know where they fit, and become more aware of how and when to use them. Examples extend to such management issues as: when you can trust an expert, how to formulate business strategies, why labor negotiations are often difficult and, in golf, why you might try harder to avoid a bogey than to achieve a birdie.
You will find that this book contains more details of psychological research than a typical management offering and is thus not a quick read. However, it is definitely worth the time it takes to grab hold of its key findings and conclusions.