Making Decisions in a Group - System 2 Thinking and Informed Intuition
System 2 may not help outrun a bear, but it can help avoid placing you in the forest where the bear chases you
I am a System 2 thinker to a fault. During New Jersey's most significant earthquake in a century, my response wasn't typical fight or flight—instead, I contemplated alternative explanations, even considering that the aftershocks were merely pebbles under my car. Such deep analytical thinking, characteristic of System 2, might not have served well in prehistoric survival, with a high likelihood of me getting mauled by a bear while I contemplated probabilities and severities.
However, System 2 thinking may be super helpful in informing your intuition in the nuanced world of long-term investment decisions.
Most decisions we make as humans is guided by intuition. However, as Daniel Kahneman has shown, our intuition may be flawed, or often ridden with bias. What he also found is that a systematic process that informs your intuition (i.e. engage your intuition after analysis) can lead to higher quality decision making.
Today, I want to delve into how to leverage System 2 thinking to better inform your intuition in group decision-making settings, like corporate and investment committees, particularly when making probabilistic decisions in the absence of complete information.
This article borrows heavily from various principles others have written and thought of. In particular, work by Hartej Singh, Annie Duke, Dan Kahneman, Michael Mouboussin, the books How Emotions are Made , Hour Between Dog and Wolf among many others. I’ve also learned these lessons from my mentors and leadership coaches.
The Group Decision Making Process
Why are you making this decision?
As simple as it sounds, in meetings you often dive into the details without taking a step back and asking two important questions—the first is ‘should we be making this decision?’—perhaps it's not a decision you need to make, and can delegate or empower someone else to make the decision.
If this is a decision you need to make, then why are you making this decision? What is it that you want to achieve from making this decision? Outlining the ‘why’ before you even begin can help kick your ‘informed intuition’ in gear.
Start with the Facts, then move to Opinions (Stories)
Begin by laying out the facts that are objective and everyone can agree with. You may never have perfect information. However, starting with the facts creates a baseline upon which you build the discussion.
Once you have established the facts, you then move to individual opinions. Express opinions, but declare them as such. Opinions are necessary, and understanding why someone holds a particular opinion is useful. Encouraging an open expression of opinion, and the reasoning behind the opinion are valuable inputs into decision making, once it's recognized that these are opinions, not facts.
Be open and account for biases, insecurities and emotions
J.P. Morgan is claimed to have said that there are two reasons for making a decision—the right reason and the real reason. The ‘right’ deals with the rational decision-making process—in quantitative terms you would define that as maximizing utility within a constrained optimization problem. However, consciously and subconsciously, our decisions (and opinions) are informed by factors that may not be related to ‘right’ reasons.
In investment committee meetings, for example, one may have a resistance to a new idea not because it's not ‘right’, but perhaps because it's unfamiliar, and they may not want to invest the energy into learning and understanding. Or perhaps because it may not reflect well on them. The impact of an idea on an individual’s job security or status in the organization cannot be ignored. Or maybe the meeting is just before lunch and people do not have the energy for System 2 thinking.
We may also make decisions based on how pleasant or unpleasant the outcome may be for us. For example, if the decision may impact another individual negatively, would you rather upset a person who is less likely to take offense, or someone who might create more unpleasantness? Decisions are sometimes made so that the ‘loudest person in the room’ doesn't get upset. While such thinking may avoid short-term unpleasantness, the decision is being made based on a factor that is unrelated to the objective.
Acknowledge that biases are part of being human and not necessarily good or bad. They just are (Sidenote: I still struggle with this, and find myself judging ‘good biases’ and ‘bad biases’).
What helps with decision making is to ask to what degree biases are detracting from the optimization function, and either account for that, or minimize their impact by adjusting the environment.
Pre-mortems and Counterfactuals help a lot at this stage of a discussion, as they allow people to visualize scenarios that they are either concerned about or are supportive of. For those whose opinions may be driven by insecurity, for example, a pre-mortem might help them visualize their worst-case scenario, and analyze it in context of the Objective.
Make the Decision
Once you trust the process, it becomes easier to make higher quality decisions. Make a decision, without being attached to the outcome.
Make more reversible decisions. Most ‘real world’ decisions will need to be made based on a mix of imperfect information, emotions, and sub-optimal constraints. Expect that many of your decisions will not experience their desired outcome. The key is to make decisions that on-balance deliver positive expected value and have favorable upside/downside ratios. Your portfolio of decisions will over time have a positive expected value, and you will learn and refine.
For irreversible decisions with greater implications (e.g. an M&A transaction, or closing a business), it's probably more important to review facts, pre-mortems, and counterfactuals, and ask whether the decision is being driven by the objective function or by your insecurity/ego?
Commonly, decision-making is driven by instinctive, fast-thinking System 1 processes, as seen in traders reacting to market movements or executives making quick calls.
However, fast-thinking System 1 may not be optimal in all situations. Adopting a more deliberate, analytical System 2 approach can enhance decision quality and consistency.
System 2 may not help outrun a bear, but it can help in avoiding placing you in the forest where the bear chases you.