• Jalal Ali

So You Think You Make Good Decisions or Find Great Deals


 

This post is written based on true events!

In 2016, two of my friends started looking for their first home here in Edmonton for their growing families. After understanding the monthly mortgage payment commitment including interest payment, both decided to cap their purchase price at less than $400,000.

Interestingly and coincidentally, both ended up purchasing a home almost at the same price, but not within the maximum limit they initially committed to, but for around $475,000 ($75,000 or 19% more than they initially decided). Not to my surprise, they both were extremely happy and satisfied with their purchase; both felt they have found a good home for the price they paid.

The same year one of my other friends started looking for his first car and he decided to buy a used car and cap his purchase price at less than $8,000. He wanted to use the cash he had and avoid taking any liability for a new or expensive car. Interestingly, he ended up getting a new car for $25,000 by taking a liability of $18,000. Once again, not to my surprise, he was extremely happy and satisfied with his purchase; he felt he got a good car for the price he paid.

I am sure you will have witnessed some similar stories in your life. One question here is paramount:

Why, in the end, are we all happy with our decisions?

Cognitive science has long proven that human beings have the tendency to rationalize every decision by retroactively ascribing positive attributes. This phenomenon is called choice-supportive bias or post-purchase rationalization.

For example, in the above two examples, my friends are likely to ignore or downplay the disadvantages of the option they choose and amplify the advantages. And the exact opposite for the option they didn’t choose, i.e. downplay the advantages and amplify the disadvantages.

Two psychologists, Linda Henkel of the Fairfield University and Mara Mather of the University of California, conducted an experiment in 2006 to test the role of beliefs about choices and decisions. In the experiment, participants were given five different choice scenarios; each scenario had two options for participants to choose one from. For example, in one scenario, they had to choose one of the two car options based on positive and negative features.

They all selected one of the two options in all five scenarios and were asked to return after one week. At that point, Henkel and Mather “reminded” each participant about the options they had chosen in each scenario but they intentionally misled participants by giving two options that were not their own. They were then asked to give their reasons and explanations on why they had made those choices. Surprisingly, participants believed and favoured all their options regardless of whether they had chosen them or not.

We have the tendency to rationalize our actions by fitting some logic to them — our unconscious, uninformed and egoistic mind hinders our ability to accept our irrationality. Therefore, it is important to have a framework that not only helps to make a rational decision but also guides us on how we should be thinking about our decisions.

Related: Thinking Framework: My big ideas for making rational decisions

#mentalmodel #decisionmaking #thinking #CharlieMunger

59 views