Thinking fast and slow
Daniel Kahneman, winner of the Nobel Prize in Economics in 2002, has published this bestseller in 2011. The book is written in a narrative style, making it an enjoyable read. Important aspects guiding our decisions are covered like: Jumping to conclusions, how judgments happen, the law of small numbers, the science of availability, emotion and risk, less is more, causes trump statistics, taming intuitive predictions, illusion of understanding, when can we trust intuition. A separate chapter explains how we make choices and how this can be influenced: Bernoullis's errors, prospect theory, the endowment effect, bad events, the fourfold pattern..
Let me pick one of the many interesting topics covered in this book to give you an idea about the practicality of the examples used. Kahneman explains the concept of "experienced utility" (p. 377-379). "Rational agents are expected to know their tastes, both present and future, and they are supposed to make good decisions that will maximize these interests" (p. 377). We all know how difficult it is to even exactly define your objectives for the present and future (strategic objectives). Let us leave this aside for now and follow a puzzle, which Kahnemann formulated to discuss the concept of experienced utility and how it may affect our decision making.
"Imagine an individual who receives one painful injection every day. There is no adaptation; the pain is the same day to day. Will people attach the same value to reducing the number of planned injections from 20 to 18 as from 6 to 4? Is there any justification for a distinction? I did not collect data, because the outcome was evident. You can verify for yourself that you would pay more to reduce the number of injections my a third (from 6 to 4) than by one tenth (from 20 to 18). The decision utility of avoiding two injections is higher in the first case than in the second, and everyone will pay more for the first reduction that for the second. but this difference is absurd. if the pain does not change from day to day, what could justify assigning different utilities to a reduction of the total amount of pain by two injections, depending on the number of previous injections? ... It also suggested that, at least in some cases, experienced utility is the criterion by which a decision should be assessed. A decision maker who pays different amounts to achieve the same gain of experienced utility (or be spared the same loss) is making a mistake. You may find this observation obvious, but in decision theory the only basis for judging that a decision is wrong is inconsistency with other preferences" (p. 378).
In the early 1990s a physician and researcher at the University of Toronto, Don Redelmeier, and Kahneman designed a survey of patients undergoing painful colonoscopy treatments (154 participants). They found two rules as a result of the pain memory of the patients:
- Peak-end rule: The global retrospective rating was well predicted by the average of the level of pain reported at the worst moment of the experience and t its end.
- Duration neglect: The duration of the procedure had no effect whatsoever on the ratings of total pain.
This research led to the conclusion that in order to reduce patient's memory of pain, lowering the peak intensity of pain could be more important than minimizing the duration of the procedure. By the same reasoning, gradual relief may be preferable to abrupt relief if patients retain a better memory when the pain at the end of the procedure is relatively mild.
Now obviously many organizations try to optimize the customer experience and specifically the memory of such an experience, because it is not the actual experience that influences future decisions about purchasing products but it is only the memory of such an experience. This is where the concepts of the book need to be transferred...
Summarizing the experienced utility concept from Kahnemann: Even if our preferences and interests are based on personal experience, tastes and decisions are shaped by memories, and the memories can be wrong! "An inconsistency is built into the design of our minds. We have strong preferences about the duration of our experiences of pain and pleasure. We want pain to be brief and pleasure to last. But our memory has evolved to represent the most intense moment of an episode of pain or pleasure (the peak) and the feelings when the episode was at its end. A memory that neglects duration will not serve our preference for long pleasure and short pains. (p. 385)
Applying the concepts of the book to our own lives: How do you try to maximize the experienced utility of your vacation? Is it the peak-end rule with duration neglect? This would mean a short trip with a maximum peak experience as well as a nice ending might be a more memorable experience than a longer vacation with a lower peak and end? I am sure you have planned your next vacation already and I wish you all the best!