How Are the Best Decisions Made?

note: Watch it until after the routine analysis . After that is kind of boring unless you want to know football betting.

When you need to make an important decision, a dispassionate consideration of the likelihood of various outcomes and their probable costs and benefits is the best way to go.

If this method is really the optimum way to make decisions, then we’d expect it would be the decision making model of choice for successful (i.e. profitable) business people. But a fascinating, new study reveals that’s not the case at all. The study of decision making by 101 stock investors in the August/ September issue of the Academy of Management Journal showed that:

Adding emotions to the decision-making process can enhance creativity, engagement and decision efficiency… The greater the average intensity of an individual’s feelings, the higher their investment returns.

How can that be? First off, it has to be noted that making decisions on pure emotions is certainly a bad idea. The question is not whether to replace data with gut feelings and sweaty palms but to supplement facts with emotions. And, of course, the first flash of anger or fear is not the time to make any decision. However, psychologists have theorized that emotions do play a key role in quality decision making. Their theory is called the somatic markers hypothesis, and it was originally developed by neurologist Antonio R. Damasio in his book, “Descartes’ Error: Emotion, Reason, and the Human Brain.”

The book examines the case of Phinneas Gage. An accident left Gage brain damaged in a specific way that disabled his ability to feel emotions though his intellect remained intact. After his accident, Gage was also unable to make decisions. Damasio hypothesized that when we are faced with complex decisions with many alternatives (as we often are in business), our rational thought process often becomes overloaded. We stumble around in a blizzard of data. Meanwhile, our emotions encode the wisdom of experience. Another experiment involving gambling illustrates how our emotions can communicate the lessons of our accumulated experience, even if our conscious brain doesn’t realize we’re wise.

The gambling task asked subjects to pick from four decks of cards (A,B,C,D). Each draw resulted in profit or loss. Naturally enough, participants were asked to maximize profit over the long term (a familiar goal). Decks A and B had high short term rewards but a higher overall rate of loss. The second two decks (C and D) had smaller short term rewards but less loss overall. Therefore, in the long-term it was better to choose from decks C and D.

Two groups participated. The first was a group of people with brain damage such as Gage’s that limited their ability to integrate emotion and decision making. The second felt emotions normally. Who learned the trick and started drawing from decks C and D first? The emotional test subjects. They started drawing from the more profitable decks even before they were consciously aware of why they were doing so. Emotions rather than lead the participants astray, were guides to the still fumbling rational mind.

Of course these are complicated theories and they are just that, theories. Still, before you start beating yourself up for never being able to live up to the model of the cool-headed, rational decision maker (or when you’ve pored over all that perfectly good data for days and still feel like you’re no closer to a decision) it might be helpful to consider whether your emotions are telling you something you ought to listen to.