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Decision-making is about making proactive choices to improve an outcome or situation. It is about bringing an element of control to what otherwise would occur only by chance. Organizations and leaders across the board agree that a structured approach to planning and decision-making is the most reliable way of making sound decisions on a regular basis and individuals have an innate belief that the decisions they make are the best possible for themselves and their organizations.
Why then do some decisions seem completely irrational? And is irrationality always a bad thing? Dan Ariely, in Predictably Irrational, states that recognizing and understanding our potential for irrationality is vital to understanding how and why we make decisions the way we do, and therefore lead us to a greater understanding of our environment and the choices we make. [1] Here we look at some of the factors that can result in an irrational decision, and whether having a knowledge of these factors can change the way we behave.
… the basic assumption that most economists hold about human nature … (is that) we are capable of making the right decisions for ourselves. Dan Ariely, Predictably Irrational (HarperCollins, 2008)
Most of us are aware that our emotions can cloud our judgment and decision-making ability. However, sometimes even what appears to be a structured and logical decision can actually have roots in irrationality.
One example demonstrated by Ariely is that of an advert for the Economist magazine.
The advert offers three options:
- online subscription $59
- print subscription $125
- print and online $125
Using this example, we can demonstrate how a decision may be made using the accepted decision-making process.
- define the decision to be made
- identify and gather information
- analyze options and make a decision
- communicate and implement a decision
Using the basic process above, the reader of the Economist advert, when thinking about purchasing an organizational subscription, would:
1. Define the decision
Would a subscription to the Economist be valuable? Assuming the answer is yes, they move on to step 2.
2. Identify and gather information
There are three different priced options on offer, as outlined above.
3. Analyze options and make a decision
The online subscription is the cheapest option, but is it the best value? The print and online subscription is the same price as the print only subscription, so Option 3 essentially offers the online subscription “for free”.
4. Communicate and implement the decision
The reader places the subscription order of their choice.
That person has now used the decision-making process and made a well thought out, rational decision. Or have they? The overwhelming choice in experiments run using the advert was for Option 3. In fact, it was selected by 84% of respondents.
But when Ariely ran the experiment again, without Option 2, the number of people selecting Option 3 dropped substantially from 84% to 32%.
Why Would This Happen?
Option 2 is what’s known as a decoy. In this case the decoy offer is placed by the advertiser to disguise the choice we have to make and sway us towards making a decision that is more financially beneficial for the advertiser. In actual fact, more and more people are happy to read online, and those that aren't can print off an article they particularly want to read. With the Option 2 decoy removed, the decision becomes much simpler and the online and print subscription no longer looks so inviting. Our brains are able to make a rational decision again, yet this time the outcome is different.
The idea behind the use of a decoy is to give us something as a direct comparison, something our brains can say very clearly, ‘this is better than that’. It doesn't necessarily follow that the decision is entirely rational and has not been ‘guided’ by a clever strategy or marketing ploy.
Another well known example of this phenomenon is the 'buy one, get one free' (BOGOF) offer. There are few people who could honestly say that they have never bought something they didn't actually need, or perhaps even want, purely because of the 'bargain' factor. Yet the BOGOF offers are colloquially known as 'buy one, throw one away' due to the increased waste generated by the unnecessary purchase. So, what appeared to a money-saving decision may not save money at all.
Avoiding the Irrational Decision
The key to avoiding falling into the trap of irrational decision-making is awareness. Knowing that human beings are fallible, that our rationality is not all encompassing, can prevent us falling into the trap. There are some simple quality control measures that can be introduced to the decision-making process.
1. What has driven the need for a decision?
- Was there actually an original need in the first place? Or has the 'need' been generated by clever advertising?
- Does the decision resolve an issue or problem? For example, will a subscription to the Economist generate more benefit to the organization than it costs? The benefits may be intangible or hard to measure, however there should be a general feeling for what it can deliver.
2. Revisit the start of the decision-making process
- Is the decision still based on the original gathering of information and analysis of options? For example, was the trip to the supermarket for a loaf of bread needed for breakfast, but the outcome is that as well as the loaf of bread two blocks of mature cheddar also go into the trolley because they were on BOGOF? The additional purchase is not necessarily a bad thing, providing the cheese will be used and does in fact save the purchaser money. If it lurks at the back of the fridge becoming progressively moldy the decision becomes more irrational.
- Has the ultimate decision been swayed by clever use of decoys? How many people have ordered something they needed online, and then ordered something extra they didn't really need in order to benefit from free postage and packaging? It may appear that the purchaser has saved by benefiting from the free postage. The reality is that unless the additional item was actually a necessity, then the cost of that additional and unnecessary item is actually lost money.
3. Phone a friend
Sometimes all that is needed is another opinion. An outsider not involved in or affected by the decision may be able to see things more rationally.
The Upside of Irrationality
An understanding of our propensity for irrational decision-making can also be used to advantage. Consider the tricks used by marketeers such as decoys and 'free offers' to increase spending. Consider how these very strategies could be used to increase market share or competitive advantage.
Could developing a decoy product increase sales of the products you really want to sell? Or could a 'free' incentive such as discounted share purchase options improve retention and productivity amongst employees?
The examples provided above are simplistic. However, on a daily basis, in work, with colleagues, family and friends, examples of apparently irrational decisions are everywhere. Perhaps thinking about them from an irrational perspective will make them more understandable.
Professor Ariely examines the advantages of irrational thinking further in his follow-up to Predictably Irrational, The Upside of Irrationality. [2]
Before making a snap decision, or even after making a well-considered decision, taking time to check thought processes can be invaluable. Being aware of how irrationality can catch people unaware can also help us to form an understanding of why colleagues or managers may sometimes make decisions we don't always understand.
References[1] Dan Ariely, Predictably Irrational (HarperCollins, 2008).
[2] Dan Ariely, The Upside of Irrationality (HarperCollins, 2010).
