What are the limits of rational decision-making?
Making good decisions in life is critical to happiness as well as prosperity.
A Linkedin user asked the question, "What are the limits of rational decision-making?"
I thought I'd share with you my answer.
The short summary is that to make good decisions in life, you have to know:
1. what kind of information is IMPORTANT given the decision you have to make
2. HOW to access that information before decision time.
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There are 4 areas in life where decisions are made: SUBJECTIVE, OBJECTIVE, SOCIAL/CULTURAL AND SYSTEMIC.
However, since your question mentions "business," let's first examine the OBJECTIVE sphere where humans make decisions.
The limits of rational decision-making are set by information that is important and that is knowable. The dot com crash, where one trillion dollars was lost by overly emotional investors (many of whom are university-educated!) is an example of focusing on information that is NOT important (at least, not for investment purposes): revenues. Earnings should have been the information to look at.
At the same time, knowing what information is important, is not enough. That information must be KNOWABLE and one must FIND it before the time at which the decision is to be made.
If the information is published in annual reports or in market research reports, then one can find it. But if the important information is in the head of an executive, then getting access to that information might require a few tricks.
The key is to get to that important information BEFORE decision time, and that is the field of business intelligence. George Friedman wrote the best book on that subject: The Intelligence Edge - how to profit from the information age.
But over and beyond those two requirements (1. the information must be important, 2. the information must be knowable and known before decision time), there seems to be a third critical aspect of rational decision-making: the structuredness of the mind making the decision.
Billionaire Charlie Munger is a good example of someone who disciplines his mind continually so as to organize it for effective deployment during decision-making. For instance, he reads extensively and constructs what he calls a "lattice of mental models", that is, a continuously evolving configuration composed of the operating principles culled from various disciplines such as stats, biology, astronomy, business, psychology, etc.
So that's for rational decision-making in the OBJECTIVE sphere of business.
"Falling in love" belongs to the SUBJECTIVE sphere of life, where feelings are more important. These feelings are valid and, in a way, "rational" for one person but cannot be verified nor validated by external instruments or by other people. The expression "love is blind" could be instructively upgraded to "love can feel what the eye cannot see."
A Linkedin user asked the question, "What are the limits of rational decision-making?"
I thought I'd share with you my answer.
The short summary is that to make good decisions in life, you have to know:
1. what kind of information is IMPORTANT given the decision you have to make
2. HOW to access that information before decision time.
===
There are 4 areas in life where decisions are made: SUBJECTIVE, OBJECTIVE, SOCIAL/CULTURAL AND SYSTEMIC.
However, since your question mentions "business," let's first examine the OBJECTIVE sphere where humans make decisions.
The limits of rational decision-making are set by information that is important and that is knowable. The dot com crash, where one trillion dollars was lost by overly emotional investors (many of whom are university-educated!) is an example of focusing on information that is NOT important (at least, not for investment purposes): revenues. Earnings should have been the information to look at.
At the same time, knowing what information is important, is not enough. That information must be KNOWABLE and one must FIND it before the time at which the decision is to be made.
If the information is published in annual reports or in market research reports, then one can find it. But if the important information is in the head of an executive, then getting access to that information might require a few tricks.
The key is to get to that important information BEFORE decision time, and that is the field of business intelligence. George Friedman wrote the best book on that subject: The Intelligence Edge - how to profit from the information age.
But over and beyond those two requirements (1. the information must be important, 2. the information must be knowable and known before decision time), there seems to be a third critical aspect of rational decision-making: the structuredness of the mind making the decision.
Billionaire Charlie Munger is a good example of someone who disciplines his mind continually so as to organize it for effective deployment during decision-making. For instance, he reads extensively and constructs what he calls a "lattice of mental models", that is, a continuously evolving configuration composed of the operating principles culled from various disciplines such as stats, biology, astronomy, business, psychology, etc.
So that's for rational decision-making in the OBJECTIVE sphere of business.
"Falling in love" belongs to the SUBJECTIVE sphere of life, where feelings are more important. These feelings are valid and, in a way, "rational" for one person but cannot be verified nor validated by external instruments or by other people. The expression "love is blind" could be instructively upgraded to "love can feel what the eye cannot see."
posted by Super Peter at 10:10 PM
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