March 05, 2016

Who knew bargaining involved complex decision making theory?

Businesses worldwide are constantly in positions where they have to make decisions, be it strategic, tactical or operational. Everyday, we too make several choices, most of which are without consciously thinking about the decisions we are making. This is down to our own intuition, which is our System 1 of our cognitive intellectual functioning, as represented by Daniel Kahneman. His idea suggests that it is this intuitive, automatic System 1 response that is really the more influential; it guides System 2 thinking - the slower, more analytical mind, governed through reasoning. The mind works in mysterious ways, and it is thus absolutely essential to be able to control when we choose to use our different systems. We should not use our System 2 when we don’t need to, as this can take lots more time and effort; we should not solely rely on our System 1 as this system is based on the power of our emotional senses and can therefore be easily fooled and tricked (just as with the fact that we, as the human race, manage to associate faces and other patterns to situations when they aren’t actually there). We should hence be able to know when to switch on our System 2 to guide and support our System 1, and when to switch in back off again. This theory is not limited to being beneficial in business contexts, but also to our individual personal lives.


System 1 thinking is embedded within our day-to-day lives through all our past experiences, and is therefore sufficient for most decisions in our lives. System 2 takes a lot more effort and time, with a larger variety of considerations to be taken into account; it should therefore be used for more complex important decisions. Our system 1 is susceptive to making biased judgements, down to four main heuristics - representativeness, recognition/availability, anchoring and adjustment, and affect. Having done the judgement test provided during the module, I learnt that I am efficient at using my System 2, especially in situations that involve calculations, probabilities and numerical analysis, perhaps due to my engineering background. However, care should be given with regards to over-confidence in ability, as well as not treating events as independent. The most valuable lesson for myself here was to treat events independently, and not to practice what I term as the ‘concurrent engineering’ approach, where I try and find links between things that don’t necessarily exist. Going through other biases, the heuristic that caught my attention the most, as it applied to what I have been doing my whole life is ‘anchoring’. Many of my friends would agree to the fact that I am very good at bargaining, as would come with my ethnical stereotype. When a seller tries to ‘anchor’ me or prime me to a specific value, I am not moved. I usually have an idea of the price I am willing to pay for something, done through research in most cases. I also then try and obtain the most value possible, by going completely out of range of what the seller usually expects, finally being able to meet close to the middle at a much better price than I would ever have paid; essentially forcing the seller to sell. This technique of priming is used very widely in the sales field, and the greatest learning to me is to pay very close attention to some of these ‘scam’ techniques.

Bargaining

Overall, it is common terminology to state that people make a good or bad decision. However, these should not be governed or be related to the outcomes of the decision, but on the processes used to come up with that decision. Through what I, together with my colleagues, have learned is that human judgement is on the whole quite poor. There is vast research into the human mind, and as a result, several robust decision making tools and methodologies have emerged to help eliminate or at least reduce how weak our decision making skills are. I didn’t know that I had already been practicing some of these techniques, or that they actually had guided methodologies, during my previous education and experience. I am an experienced user of Computational Fluid Dynamics software like Star-CCM+, a simulation tool. When modelling, each event is treated independently, and several hundred external factors taken into consideration. This is very complex, and actually put into perspective how hard it is to make a decision had I not been able to account for all these inputs. I hence believe that simulation is a very powerful set of algorithms and calculations that can help relieve the stress it would place on the human mind if a person was to carry out all these calculations by themselves. Another example I have used before in making decisions is CAE and FEA (Finite Element Analysis) - another modelling tool that helps a designer decide what the optimal design situation is. The two mentioned are very complex System 2 integrations, and are not for use by amateurs. There are more simple methods such as grid analysis, decision trees, SMART and AHP, which I believe can be used by anyone and everyone. The use of matrices has shown to be a common feature in some of these methods, demonstrating some of the qualities necessary in order for decisions to be made, such as being able to clearly decide between two options and ranking options in order of preference. After briefly touching these tools, I can see how most of the tools and techniques are useful for presenting ideas in a logical structure, adding to basic System 1 findings and knowledge with factual data. Most importantly in the business context, choosing the correct one or integrating the relevant ones can save a lot of time and reduce costs.


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