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The Psychology of Decision Making in Risk (Part 2 of 2)

The Psychology of Decision Making in Risk (Part 2 of 2)
Psychology, Strategy, Series

Article Rating:::: 60 Ratings :::: Sunday, January 3, 2010
 

This article is followed from Part 1. Ideally you should read the first part and answer the two questions proposed before reading this part which explores the concepts and analyses the results.

We are confronted with decision making every day. When making decisions, we usually use what is known as a heuristic approach, we simply use our instincts to respond to situations. Are we always right? Is it always easy to decide? How does this relate to decision making in Risk?

Let’s look at the results obtained in Part 1. 

 

Here are the links again. View the results and see what you think.

Risk Decision Making Question 1

Risk Decision Making Question 2

These results are still live, though at the time of writing, they were as follows. For the first question, 69% chose Strategy A. However, for question 2, 56% of users selected Strategy C. It seems that there was a significant increase in voting for Strategy D in comparison with Strategy B.

If you look at the questions and strategies proposed, you will realise that the strategies effectively match each other. The difference is only in the wording and formulation of the strategy. Ideally, people who chose Strategy A should have chosen Strategy  C as well, but obviously not everybody did. Why did we get these results?

To answer this, let’s go back to 1979, when Daniel Kahneman and Amos Tversky carried out a seminal research that become famous. They provided the following scenario to people and expected them to choose an ideal strategy:

“Imagine that the U.S. is preparing for the outbreak of an unusual disease which is expected to kill 600 people. Two alternative programs to combat the disease have been proposed. Choose Program A, and a projected 200 people will be saved. Choose Program B, and there is a one-third probability that 600 people will be saved, and a two-thirds probability that no one will be saved.”

What would you choose?

Kahneman and Tversky reported that 72% of respondents chose Program A, despite the fact that both programs offer the same outcome. Now, consider another scenario:

“Imagine that the U.S. has come up with two additional programs to combat the disease expected to kill 600 people. If Program C is implemented, 400 people will die. Select Program D and there is a one-third probability that no one will die and a two-thirds probability that 600 people will die.”

What would you choose now?

This time, 78% participants chose Program D even though the two programs are effectively the same.

Notice the similarity between these results and the results on Risk scenario. In both cases there seems to be a preference in Strategy or Program A and a reduced interest in Strategy or Program C. This simple, yet powerful research emphasises the importance of framing when presenting alternatives. It seems that the way you frame available options to someone can have a significant effect on how they may respond or decide.

When people were asked to select between A and B, the vast majority selected A; a sure way to save lives. On the other hand, when confronted with C and D, people preferred D to avoid choosing an option which led to loss of life. A and B were framed based on saving lives while C and D were framed based on losing lives.

What does this research suggest? It suggests that humans don’t always think rationally. Most people will do far more to avoid losing something they already have than they will to get something they don’t have. In other words, fear of loss is a much greater motivator to most people than the possibility of gain.

Kahneman and Tversky went on to win the Nobel Prize in economics and are still the only two non-economists that have been awarded this prize.

You can easily map this observation to many situations and observe irrational human behaviour. Fear of losing a job is stronger than gaining a better one. People spend more time saving money or look for discounts than to find ways to earn more money. People are more afraid of losing money in stock market than the possibility of gain.

And of course in Risk, players tend to focus on securing what they already have gained, such as continents, than to think on expanding to new areas. In other words, players are naturally conservative. They are more afraid of losing their armies than gaining new strategic positions, resources or alliances. When negotiating, appeal to fear of loss as opposed to gaining something new. Other players will take you more seriously if they think what they have is under threat than if you try to convince them of something they would gain.

Remember, your own decision making is subject to this rationality, so always think of this research as a cue when making decisions so you can think more rationally.



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