Rational Decision Making Still Valuable (R. R. Goforth Commentary)

Thirty or so years ago we saw a surge of interest in rational decision analysis: rather mechanical calculated procedures and spreadsheets designed to ensure better decision making. Proponents of DA were optimistic in the belief that objective, rational and fact-based thinking would introduce a new world of sound multidisciplinary decision making. At the same time, adherents of DA were typically dismissive of emotions and associative thinking or, the value of gut instinct.
Decision analysis was borne of idealism but it evolved into dogma and ultimately failed to appreciate and incorporate human psychology.
The promotion of formalized and procedural DA shares some features of other business world vogues that brought early excitement but fizzled fast. Artificial intelligence applications and “re-engineering” the workplace/business practices are notable examples. Perhaps there are lessons to be learned.
Expectations for what AI would do for us were based on simplistic and flawed models of human cognition. While early “clockwork” models advanced to models involving discrete steps as in digital computing, they were still deficient.
There was even the expectation that when computers reached a certain speed they would be able to “think” just like humans and even experience emotions. But computers have now considerably surpassed those original requirements for speed and memory and they cannot duplicate the cognitive processes of a flea.
The idea that DA is the end-all of decision making methods has been changing since 2002, when the Nobel Prize for Economics was awarded to Vernon Smith and Daniel Kahneman. Their research on human judgment and decision making showed irrational behavior is far more widespread and normal than is generally believed. They went on to identify some of the tendencies that induce irrational behavior, a knowledge of which should help us all better appreciate how we arrive at individual and collective decisions.
Kahneman identifies, for example, what he calls the “availability error,” which results from our tendency to judge matters by the first thing that comes to mind. This bias may be the result of a recent coffee shop conversation or a report on the radio, and frequently outweighs other evidence that should be brought to bear on the decision.
It would appear that “rational decision analysis,” promoting almost computer-like thinking as it does, is not exactly dead. It is just not likely to be the panacea its originators thought it would become. Decision analysis should remain one of the tools available to us, but also should only be used with the full realization that human decision making is much more complex than can be captured in numbers alone.
What are the implications for the business world? Did we learn from the “dot-com” bust anything that will help us avoid such busts? Probably; but only at the level of fear (subconsciously, of risk). This is likely to be a significant, if irrational, element in our decision making. Overall, our decision making skills themselves may not have improved at all. We proceed on our merry way with many of us assuming the cyclical nature of financial markets to be inevitable.
However, if we step back and take a look at the relatively efficient public financial markets, we recognize that buyers and sellers must make efficient and sound pricing decisions. In the public markets, these decisions are supported by for-profit organizations that provide analysis and valuation information without which rationality is virtually impossible.
To have the comparable efficiencies in the private capital markets, buyers and sellers need such support mechanisms in their marketplace as well. Appropriate analytical tools, most likely best provided by the private sector, have long been needed but are just now being developed and made available.
In the meantime, and until these tools are in widespread use, caveat emptor.
R. R. (Ron) Goforth, Ph.D., is the President of Beta-Rubicon, Inc., and CEO of EquityNet, LLC, both of Fayetteville. He may be reached at (479) 444-8118.