UncertaintyPsychology of Personal Decision-Making

Pascal

“It is not certain that everything is uncertain”

Agenda

Uncertainty!

A perplexing thought?

“If we can’t be certain about future consequences of alternatives, how can

we be confident we choose best?”

What to do?

Uncertainty Proof Our Alternatives! Robust▪ Assumes little about predicting the future

Non Quantitative Strategies like diversification and risk

sharing

Sensitivity Analysis

Maximize EV (later)

Uncertainty Awareness

We tend to be overly confident in our beliefs Requires effort to doubt ourselves

We rely on what we know to predict the future There are problems with this What’s the risk in the status quo?▪ Rarely ask ourselves that!▪ SQ is usually perceived as less risky▪ Flemings on Kitchen Nightmares <pic>

Purchasing Power and Inflation Risk Bonds are worth a specified number

of dollars in the future People think of them as “safer” or “less

risky”

Stock prices can adjust for inflation – especially internationally “Risk-free” bonds could be riskier than

stocks!

Woeful examples of the future not being like the past Home prices, mortgage nonsense and

subsequent bubble People building in flood plains

TAKE AWAY: Anticipating uncertainty is an important part of structuring decision opportunities Requires creative thought▪ Stimulus variation

Stimulus Variation for Uncertainty Look at your fact table

What entries are you most uncertain about?

Look at your 1-10 table What entries are you most uncertain about?

Look at your alternatives Which alternative is the biggest gamble?

What could go wrong? What could go right?

Stimulus Variation for Alternatives cont’d Royal Dutch Shell

Put bounds on the future▪ Might wish to share process with Exxon and BP!

Think of best and worst outcomes▪ #1 Put best in one scenario▪ #2 Put all worse in another▪ #3 Derive plausible scenarios from combinations ▪ #4 Imagine how stakeholder(s) would respond in

those situations and PLAN Makes the improbable vivid, if not more

probable

What this section is all about… How to think better about multiple

futures

Why we think in terms of a single future Reliance on mental habits (status quo) Limited processing capacity Defensive avoidance (motivational)

Warning signs:▪ Excessive emotionality▪ Unwillingness to think through alternatives

Countermeasures:▪ Realistic hope we can deal with uncertainty▪ Emotional distance from the problem▪ Process orientation

Regret

Regret

After the decision has been made and the future has arrived!

Intensity of regret increases with the severity of the loss (Bell, 1982)

Consequence of poor judgment not at decision point, yet at the time you’re feeling it!

We’re goofy like this:

Looking forward we experience less uncertainty than we should

Looking backward we experience even less uncertainty than when looking forward

Hindsight Bias

Belief the way things actually turned out was easy to foresee

Countermeasures Remind yourself of what you knew at the

time of decision (therapy) Prepare yourself to live with the worst

scenario (inoculation)▪ Also prepare to remind yourself what was

known (therapy preparation)

Principles of Uncertainty Proofing Control Obtaining information Keeping options open Diversifying Sharing Risk

Control

Increase probabilities of desirable outcomes: Seeding rain clouds to sell umbrellas Test runs – travel relationships Joining organizations/activities to get a

mate Start the search early and let a lot of

people know to get a job

When using control, account for Time, money, risk to personal feelings

Obtaining Information Waiting

ADVANTAGES: Costs tend to be lower DISADVANTAGES: Procrastination, other windows of

opportunities can close WEIGH: Benefits of waiting against the costs of waiting

Seeking: some associated cost Looking, asking advice, research, or trying things out

(retirement couple)

Ask yourself: “When would be the best time to make this decision?”

Keeping options open

AKA “Contingency planning”

Have a fallback plan

Ask: “What do I do if this doesn’t work?”

Have resource reserves: people, money, time Consider when these values appear in

your table to weight them more!

Keeping options open

Seek reversible alternatives

Don’t burn bridges! SPR, CPF, and CP… and 1bog

Diversify

If you like risky investments, consider making 20 of them instead of 1

Can think of diversification outside of $! Emotional diversity Network of friends Spousal death

Risk Sharing

If in a leadership position, share decision making process + organizational justice perceptions▪ + retention, affective org. commitment, and

OCBs

Sensitivity Analysis

“If a difference makes no difference, don’t give it any more thought!”

Sensitivity Analysis How does new car react to the way you

normally drive?

For decisions: Tests your model against your intuition and

allows you to trust it more▪ Like flexing out a rental car

Guides your future work on the decision▪ Don’t think about aspects of decisions which don’t

matter!

Sensitivity Analysis Procedure:

1. Identify one or more columns with high importance weights

2. Identify 2 or more rows with high total values3. Focus on the cells with at the intersections

which you’re uncertain4. Tweak changes in direction that can change

your decision5. Think of values and events that could change

your decision