Of Two Minds When Making a Decision

Publication Date:

15th Feb, 2010

Brief Author:

Alan G. Sanfey and Luke J. Chang

Authors, Alan G. Sanfey and Luke J.Chang, show how the decisions we make do not happen by a single process, but by both automatic and controlled processes. While these processes usually interact seamlessly, they may compete at times. This has its implications in behavioral economics and hence with real-business scenarios. By implication, this gives us the basics of how to understand customer decision processes.

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Of Two Minds When Making a Decision

by Alan G. Sanfey and Luke J. Chang

Perspective

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Gleaned Insights

Human decisions are governed by 2 broad processes – the automatic and the controlled
While standard economic theory uses the controlled or the rational process as its basis, human behavior is seen to be governed a lot by the automatic, intuitive process
It has also been demonstrated that financial and business decisions follow the intuitive process many a time rather than the cognitive-logical process.

Overview

The authors state that multiple processes determine the decisions we make. Occasionally, these processes compete. The major reason for the internal disagreement is the one between automatic and controlled processes.

The Decision-Making Processes

System 1, the automatic process is one that is experienced, intuitive and takes mental shortcuts, helping us respond instantly. These are responses that are hard-wired into our brain.

System 2, the controlled process is slow, effortful, conscious and rule-based. Firstly, it is likely to be employed when faced with a new situation, eg., a novice driving a car, doing so carefully, making conscious decisions. Secondly, it may also be employed in situations which normally involve System 1 decisions, but in particular scenarios, the person switches to the System 2 process. Eg. An old hand at car driving who normally does it intuitively. Faced with a new situation like extreme weather, heavy traffic or mechanical failure, a more logical process is involved, overriding System 1 decisions.

Behavioral Economics

System 2 bears close resemblance to standard economic theory with its rational style of functioning. These models have predicted human behavior based on rational thinking, but decades of research shows that actual human behavior differs from the rational. Eg., people have been found more sensitive to losses than to gains, what is termed loss aversion. This doesn't fit with economic theory, but it appears to be hard-wired into the brain.

The authors make a conjecture that the controlled process may account for only part of the overall behavioral repertoire, and in some cases face stiff competition from domain-specific automatic processes.

Turning The Processes to Advantage

A greater understanding of the processes and context within which people take decisions, help decision-makers create scenarios that can bring about the desired action. During research activity, making slight changes in the font, asking participants to perform physical actions like furrowing the brow, which is a cue for cognitive effort, led to decreased reliance in intuition, forcing them to think.

Other research demonstrates that when people are asked to commit money in the distant future, they are more economically rational. This bears out the reasoning that System 2 seems to be in charge of future decisions, while System 1 is interested in the present moment.

Conclusion

Research continues into the specifics of how and when these systems work from a psychological point of view as well as their functioning at the neural level, that is, which parts of the brain are involved in which system. Meanwhile, current findings hold significant value for companies which are new entrants, trying to find their way into markets with entrenched participants and customer awareness of the vendors.

8020CEOView: To companies, it is of interest to note that, subtle alterations in the expected scenario can make people shift from System 1 to System 2.

So companies cannot draw generalized conclusions that the customer always takes rational decisions. Although the general perception is that, B2C customers are more intuitive decision-makers, it is believed that B2B customers are rational decision-makers. This isn’t always true. B2B customers are human too - loss aversion, playing safe rather than going for greater benefits can take many forms. Companies routinely settle for a product that is a safe decision. They instinctively choose known brands that fall into certain acceptable slots, foregoing the extra benefits that a new product or service offers over the known brand.

For new companies, the implications are clear. Their offering needs to be significantly higher in value. It needs to reach the tipping point where it is hard for the customer to ignore the higher benefits. But, when their offering is a “better” product with higher value, but not significantly so, they need to see if they can introduce elements that can change the parameters of decision-making.

Check what the customer’s instinctive response could be. Vary the stimuli. Think of introducing parameters that make it difficult for them to rely on an automated checklist when making a decision. See if you can introduce elements that take them away from the notion that the leading solution or the current solution is the right one or is the safest decision.

Final Evaluation

The research provides a basis for companies to consider the parameters that can change customer behavior from the automatic to a cognitive process
In case of established companies, it gives the guidance of how to ensure that a certain customer behavior remains in the automated zone - where automated equates to the company’s offering.

Take Away & Action Items

The research provides a basis for companies to consider the parameters that can change customer behavior from the automatic to a cognitive process
In case of established companies, it gives the guidance of how to ensure that a certain customer behavior remains in the automated zone - where automated equates to the company’s offering.

Links:

Alan G. Sanfey and Luke J. Chang

Of Two Minds When Making a Decision

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