Decision ego

A recent study (1) claims that people use logic in making decisions, even though in many cases it may appear that they are going with the gut. The article argues that if the information available is not clear, they may make a gut based call but they are aware of the fact. The study may have to extend further into who makes the decision and how the decisions may impact the decision-maker to fully appreciate the drivers of the decision.

For example, certain decision-makers are paid large sums of money because either the shareholders or the owners of the capital believe that they are good decision-makers. If the results of the decision are not going to be measured for a long period of time or if the results cannot be directly attributed to the decision made, such decision-makers have an incentive to make only gut based decisions. Since their compensation is directly proportional to the untestable belief that they are good decision-makers, it is important for them to shun logic and demonstrate that the decisions they make are private and proprietary.

The decision ego, the need to make gut based decisions, is slowly killing companies and whole industries. Archaic compensation systems and misguided perceptions have created a class of decision-makers, largely driven by ego. In many cases, such repeated experiments make them believe they are in fact good at making gut based decisions and logic does not play much of a role. In most cases, they have to only demonstrate that their decisions are fully private and not that such decisions are good ones. For example, in the venture capital industry, portfolio managers make gut based calls based on what they believe. This is crucial as they have also trained the capital providers to believe that only they can make such decisions.

Decision ego – the propensity to make gut based decisions without analysis or logic – is now prevalent in most industries. Most of this is driven by compensation systems that do not reflect value and perceptions that are perpetuated without logic or analysis (2).

(1) People don't just think with their guts; logic plays a role too. Published: Thursday, December 29, 2011 - 14:32 in Psychology & Sociology

(2) Decision Options: The Art and Science of Making Decisions. http://www.crcpress.com/product/isbn/9781420086829