Traditional economics does an excellent job explaining human decision-making in situations where people have all the facts and are thinking logically. Nevertheless, in our everyday lives, we often do not have complete information and decisions can have an emotional impact as well. Dealing with these uncertain and risky day-to-day decisions can often lead to bias, require emotional regulation, and may result in habit formation.
Therefore, to help explain these choices under uncertainty and risk, the discipline of behavioral economics taps into theories and research from various domains within psychology. Together, they offer some unique insights into how we can make better day-to-day decisions (and “nudge” the choices of other people, too).
To begin to understand and apply those insights, we must first start with a basic premise—that we don’t always think about our choices and decisions the same way. Sometimes, we may think about things in a fast and automatic way. At other times, we may consider things more slowly and deliberately. In turn, each of these ways of making choices has its own pros and cons.
Thinking Fast and Slow
In his book, Thinking, Fast and Slow, behavioral economist Daniel Kahneman discusses these finer points of thinking in detail. Specifically, he uses the framework of two “systems” of cognition. Kahneman (2011) explains:
“System 1 operates automatically and quickly, with little or no effort and no sense of voluntary control.
System 2 allocates attention to the effortful mental activities that demand it, including complex computations. The operations of System 2 are often associated with the subjective experience of agency, choice, and concentration” (p. 20-21).
In the rest of the book, Kahneman (2011) goes into detail about the differences between these two general processes of thinking and their impact on various types of decision-making. Particularly, he notes that, while System 1 thinking may be fast and effortless, it often jumps to the wrong conclusions, relies on hunches and biases, and may be overconfident.
In contrast, System 2 thinking is usually more balanced, acquiring greater information and using more reliable decision rules—but requires attention and effort (which is often limited). Taken together, then, making the most of our decision-making capacity is often about balancing and managing when we are thinking fast versus when we are thinking slow.
Simple Rules for Better Decision-Making
Given the above, a few general tips can help improve your decision-making.
1. Rest or sleep on it.
When you have to make a big and important decision, it may be best to do it when you are rested, focused, and motivated. According to Kahneman, complex and effortful thinking (system 2) requires attention, motivation, and self-control. All of those resources are more limited and depleted when we are already busy, stressed, and tired.
Although there have been some challenges to this idea, a recent review by Baumister, Tice, and Vohs (2018) noted the negative effects of such depletion on the decision-making of children in academic settings, hospital staff, judges, and voters. Therefore, when possible, think through important decisions when you are well-rested, clear-headed, and have the energy and motivation to dedicate to the task. Your mother telling you to “sleep on it and decide in the morning” was probably good advice.
2. Take your time.
Thinking clearly and logically takes time, too. When we are under time pressure and short deadlines, our fast-thinking (system 1) takes over instead. For example, according to research on financial decisions by Kirchler and associates (2017), individuals are more likely to make risky choices under such time pressure.
Thus, when we are in a rush, we jump to a quick conclusion that may be full of biases and hunches, rather than carefully thinking through the facts and information. Therefore, quick thinking might be helpful for small, habitual, everyday decisions that don’t require much deliberation—or have many risks involved. Nevertheless, if the decision is more complex and important, then take the time to think it through thoroughly.
3. Gather the facts.
Beyond having the time and energy to think clearly, our decisions are only as good as the information we have about our choices and options. We can ponder a choice for hours, but if the information we mull over is very limited, or of poor quality, then all that effort and thought will be much less effective. In the end, with such uncertain decisions, we’re left to rely on our biases and hunches to fill in the gaps anyway (system 1).
Therefore, the more reliable facts and information we can gather and consider about a decision, the more we can reduce our uncertainty and make better choices. For example, work by Ariely (2000) notes that the more customers are in control of the flow of information they receive about a consumer decision, the better they can match their preferences, improve their knowledge about the domain, and increase confidence in their judgments.
Nevertheless, there is no such thing as “perfect” information—and endless evaluation is not effective either (sometimes called analysis paralysis). Ariely (2000) also notes that controlling the information flow is demanding and taxing. Given that, the trick is to balance the information with the importance of the decision. So, when you are considering something big and important, feed your system 2 processes with more of the facts to help you make a better choice.
4. Stay open to all possibilities.
Sometimes, our quick thinking biases how we consider facts, information, and options along the path of decision-making—not just at the final decision. Particularly, as noted by Gilbert (1991), we often automatically accept things as “true” before we carefully deliberate about them. Also, according to Kunda (1990), our reasoning about an issue may be motivated by a “directional bias,” leading us to selectively review only the information and facts that support what we already want to believe.
Given that, we can often jump to conclusions, or be biased to confirm something that we want to believe, rather than honestly looking at what all of the information and facts are really telling us. Therefore, when making important decisions, it is helpful to stay open to all of the facts and possibilities (especially to the ones you don’t want or like). While more challenging and perhaps uncomfortable at times, this mindset can help you avoid making those decisions that may “feel good” in the moment, but blow up in your face later too.
5. Create rules.
Even the best decision-makers are still human. We all get tired, unmotivated, rushed, stressed, and emotional at times. Beyond that, gathering every fact and carefully thinking through every decision is impossible—especially as we move through our day-to-day lives.
That is why, when they are thinking clearly, more effective decision-makers often set up simple rules and formulas to make better choices—even when they are rushed at a later date. In Thinking, Fast and Slow, Kahneman (2011) notes that using such strategies, formulas, and algorithms is often superior to intuitive decision-making in a number of fields. Also, in a review article on behavioral finance, Ricciardi and Simon (2000), advise investors to set up an investment checklist as part of a “disciplined trading strategy,” in order to minimize the effect of emotional biases that can impact buying-and-selling decisions in the moment.
Looking at more everyday examples, an individual might make a grocery list at home while considering what they really need (and stick to it at the store), rather than being tempted by immediate hunger or expensive sweets. Alternatively, they might set a firm upper limit for a big purchase, as they dispassionately consider what they can comfortably afford (rather than getting swept away by “falling in love” with a house or car that they struggle to pay for later). In short, even in situations where we might get caught up in biased and emotional thinking, we can often set up rules or formulas ahead of time to see us through.
For more information on how these fast and slow decision-making processes can be used to persuade others, see "7 Tips for Better Persuasion."
© 2018 by Jeremy S. Nicholson, M.A., M.S.W., Ph.D. All rights reserved.
Ariely, D. (2000). Controlling the information flow: Effects on consumers' decision making and preferences. Journal of Consumer Research, 27(2), 233-248.
Baumeister, R. F., Tice, D. M., & Vohs, K. D. (2018). The strength model of self-regulation: Conclusions from the second decade of willpower research. Perspectives on Psychological Science, 13(2), 141-145.
Gilbert, D. T. (1991). How mental systems believe. American Psychologist, 46(2), 107-119.
Kahneman, D. (2011). Thinking, fast and slow. New York, NY: Farrar, Straus and Giroux.
Kirchler, M., Andersson, D., Bonn, C., Johannesson, M., Sørensen, E. Ø., Stefan, M., Tinghög, G., & Västfjäll, D. (2017). The effect of fast and slow decisions on risk taking. Journal of Risk and Uncertainty, 54(1), 37-59.
Kunda, Z. (1990). The case for motivated reasoning. Psychological Bulletin, 108(3), 480-498.
Ricciardi, V., & Simon, H.K. (2000). What is behavioral finance? Business, Education & Technology Journal, 2(2), 1-9.