Standing at a personal or professional crossroads, do you try to think rationally or go by gut feeling? Ever since Plato, humans have thought of ourselves as rational creatures. When we make a decision, we are supposed to consciously analyse the alternatives and carefully weigh the pros and cons. There's only one problem with this assumption of rationality - it's wrong. It's not how our minds actually work.
It turns out that we weren't engineered to be rational or logical or even particularly deliberate. Instead, our mind holds a messy network of different areas, many of which are involved with the production of emotion. Whenever we make a decision, the brain is awash in feeling, driven by its inexplicable passions. Even when we try to be reasonable and restrained, these emotional impulses secretly influence our judgement.
Emotional flaws When we eat too much food, or spend too much money, it's probably because we're listening to our emotional brain, when we should really be thinking rationally. When our emotions get out of control the result can be just as devastating as having no emotions at all. In recent years, psychologists and neuroscientists have identified a long list of these emotional flaws.
Consider a mistake known as loss aversion, first identified by the psychologists Daniel Kahneman and Amos Tversky. The psychologists noticed that, when people were offered a gamble on the toss of a coin in which they might lose $20, they demanded an average payoff of at least $40 if they won. The pain of a loss was approximately twice as potent as the pleasure generated by a gain. Furthermore, our decisions seemed to be determined by these feelings. Loss aversion is now recognised as an important mental bias, with widespread implications. Our desire to avoid anything that smacks of a loss often shapes our behaviour, leading us to do foolish things.
Look, for example, at the stock market. When investors evaluate their stock portfolio, studies show that they are most likely to sell stocks that have increased in value. Unfortunately, this means that they end up holding on to their depreciating stocks. Over the long term, this strategy is exceedingly foolish, since it ultimately leads to a portfolio composed entirely of shares that are losing money.
Postpone the pain Even professional money managers are vulnerable to this bias, and tend to hold losing stocks twice as long as winning stocks. Why do investors do this? Because they are afraid to take a loss - it feels bad - and selling shares that have decreased in value makes the loss tangible. We try to postpone the pain for as long as possible. The end result is more losses. So how should we make a decision? The key is something called metacognition, or thinking about thinking.
The best way to make sure that you are using your brain properly is to study your brain at work. Why is thinking about thinking so important? First, it helps us avoid stupid errors. You can't avoid loss aversion unless you know that the mind treats losses differently than gains. And you'll probably think too much about buying a house unless you know that such a strategy will lead you to buy the property. The mind is full of flaws, but we can outsmart them. There is no secret recipe for decision-making. But learning about how we think can help us think better.
