Neurodecision Science - Four Steps to Decision Making

Neuroeconomics - Four Steps to Decision Making:

How to make the right decision

How people make wrong decisions

The relationship between IQ and individual differences in decision-making ability

Decision-making skills that we develop throughout our lives

Neuroeconomics - How to make the right decisions?

Individual decision-making is quite difficult, and the decision-making ability of an individual may affect his or her entire life. In the information age, we have discovered an important problem, that is, individual decision-making ability and algorithm-based applications are very flawed, which leads to the fact that we often need policy support or decision-making agents when making decisions. For example, filling out college entrance examination applications, purchasing insurance, financial management, health management, and various risk decisions. As long as there is uncertainty about the outcome and the individual has specific expectations, this decision is a risk decision.

Decision-making is based on differences in individual values ​​and beliefs, and different values ​​and beliefs lead to different decision-making quality. Moreover, the quality of a decision is not determined by the result, but by the decision-making process, which is interfered by accidental factors, but generally speaking, the quality and rationality of the decision-making process can enable individuals to obtain better decision-making results.

1. Belief Assessment

Judge the probability of various results of decision options. There are outcome expectations in each decision option, including good and bad outcomes. The judgment of the probability of these outcomes is belief assessment. According to the degree of correspondence with external standards and the degree of fit with other beliefs, we can measure the individual's belief assessment ability. That is, our judgment of the probability of results should be consistent with statistics and probability theory. For example, the sum of the probabilities of mutually exclusive events (such as life and death) should be 100%; most people are likely to be ordinary people, but are more likely to break through "ordinary people" in terms of attributes.

2. Value Assessment

Evaluate the extent to which various outcomes achieve the goal of the decision. In order to make wise decisions, people need to be able to evaluate the value of the possible outcomes of their choices, that is, to evaluate the value of the possible outcomes after the decision. The corresponding law holds that value assessment should follow the sunk cost rule, assuming that options should only be evaluated for expected future outcomes and should not consider how much cost has been invested before.

No one will continue to invest in unfavorable options. The conclusions drawn from game theory are consistent with neuroeconomics. Once an event that is unfavorable to cooperation occurs, stop losses immediately, and once there is a possibility of cooperation, start cooperation again immediately. It should be noted that the evaluation of option value should avoid the framework effect caused by different descriptions. For example, a 95% probability of a drug being safe is equivalent to a 5% probability of causing adverse reactions.

3. Integration

Combining beliefs and value assessments, choose the option that is most likely to achieve your goals.

Making good decisions also requires the ability to compare options, evaluating relevant outcomes based on beliefs and value assessments, and choosing the option that is expected to achieve the greatest personal value. Normalized decision theory calculates the expected value of each decision option by multiplying the probability of the expected outcome of the decision option by the expected value of the option outcome.

Decision makers need to systematically consider all possible options and the attributes of all options. If these normative strategies can be applied accurately, then these strategies should follow the rule of fit, that is, they should be logical: option A has an 80% belief in the outcome and an outcome value of 1, option B has a 60% belief in the outcome and an outcome value of 2, option C has a 40% belief in the outcome and an outcome value of 4, then A is less than B and less than C, so A is less than C.

4. Metacognition

Refers to the degree of understanding of individual capabilities

Good decision makers need to understand their decision-making process, their own knowledge, and the limitations of their own abilities. This allows them to be aware when seeking information or getting advice from others. This ability is often measured using knowledge tests by asking people to rate their confidence in their performance. When confidence judgments match overall performance, the decision maker is considered to have good self-awareness.

Next chapter: Prospective and descriptive research - people violate normative rules when making decisions How we make mistakes in decision-making and how to avoid them.

Neuroeconomics: Misconceptions of human decision making

Descriptive research on judgment and decision making explores when and why people violate normative rules (i.e., go against logic and mathematics). Researchers have found systematic decision-making errors in belief evaluation, value assessment, integration, and metacognition.

1. Belief Assessment

An individual's probability assessment of future events is his or her expectations and beliefs, which can be quantified. Researchers often use questionnaires to assess an individual's expectations and beliefs about the future. Whether an individual's assessment of his or her beliefs is realistic is an important part of rational decision-making.

For example, participants were asked to answer their chances of living to a certain age or being diagnosed with a life-threatening disease. People often show unrealistic optimism, overestimating the likelihood of positive events they experience and underestimating the probability of negative events, even after seeing the statistics. People always underestimate their chances of getting sick and overestimate the quality of their future life.

This optimism may reflect people's wishful thinking and cognitive processes: when faced with common uncontrollable events, people are more likely to judge themselves as less risky than others because they know how they will protect themselves, but they don't know how others will do.

2. Value Assessment

The second major mistake people make when making decisions is violating the Correspondence Principle when evaluating their options. In other words, people often hold onto failed investment options in the past, hoping for a reversal. People always expect a falling stock to rebound, a prodigal son to return, a student to be obedient, a gambling loss to win back, and a lover who has broken up to come back. These are all typical examples of violating the Correspondence Principle - not recognizing sunk costs.

In rational behavior, the correspondence rule assumes that decisions should not be made without regard to previous investments, but rather evaluated by expected outcomes. In experimental studies, researchers gave subjects two options: to continue or terminate a failing behavior. The results showed that people often hesitated to terminate because they were worried about wasting their previous investments.

Moreover, violations of the rule of fit were also found in value assessment. That is, the framing effect. If the adverse reaction of a drug is 5% and the effectiveness is 95%, then different descriptions will affect people's decisions. People are more inclined to choose the latter description and refuse to choose the former description. But it is also possible that people's decisions are influenced by the describer.

3. Integration

Descriptive studies exploring people’s ability to use decision rules have found violations of normative theories. When participants are asked to choose between decision options that differ in attributes, they fail to use normative strategies to compare options with different attributes.

For example, when a person goes to the gym, how should he choose a trainer? People often use simple strategies, choosing the option with the highest value in a certain attribute, rather than the option with the best combination of all attributes. People usually like to choose a good-looking trainer. Or they will choose the first option that meets the minimum requirements. For example, when choosing to eat, the multiple attributes of food often confuse people, so people may choose the minimum requirement, such as sufficient quantity or delicious taste, without considering nutritional ratio and cost-effectiveness.

Violation of the rule of fit, that is, violation of probability theory, reflects the systematic bias of quantitative judgment. For example, people do not realize that they may also die from various causes. Assuming that the average probability of a middle-aged individual dying from various events in ten years is: the probability of pancreatic cancer is 0.3%, the probability of dying from lung cancer is 1%, the probability of dying from a car accident is 3%, etc., then the accumulation of these probabilities is his average total probability of death in ten years, but individuals often do not realize that the total probability is very large, so they prefer to believe that the probability of each cause of death is very small, and the total probability is also very small. Therefore, if a person either lives or dies, the total probability of life and death is 100%, but people judge that such a probability is always less than 100%.

However, psychological research points out that it is this optimistic belief that regulates personality. Self-expectation makes individuals more positive and more confident in their own strength when processing overall life. However, in decision-making, such judgments are flawed. For example, when investing in health, people often ignore health risks and underestimate the importance of health investment.

4. Metacognition

The classic description of metacognition research asked the subjects to answer some knowledge questions, such as: "Which kind of exercise is more effective in reducing fat? Aerobic exercise or high-intensity resistance exercise?" Then they were asked to make a confidence judgment on their answers (50% = guess, 100% = sure). The study showed that the average confidence judgment of each item was higher than the total correct rate, that is, the confidence in one's own judgment was higher than the selection rate of the correct answer.

To a certain extent, overconfidence comes from the fact that people tend to affirm rather than deny their own answers. In psychology, this is what every individual does to maintain self-integrity. If you deny your own answer, it is equivalent to denying yourself. This tendency may be more obvious in group decision-making and consultant decision-making - in group decision-making, people not only have to maintain their own integrity, but also obtain circumstantial evidence to maintain collective consciousness; while consultant decision-making is to transfer confidence to the consultant, consultant equals professional knowledge, then confidence equals professional knowledge. Therefore, in these cases, people are more likely to make decisions by treating confidence as knowledge. This is a typical metacognitive bias, and there is a problem with self-estimation ability.

The relationship between IQ and individual differences in decision-making ability

Cognitive neuroscience: the relationship between IQ and individual differences in decision-making ability

Research reports that decision-making ability changes with age have been questioned. Some researchers believe that adolescents perform well in test-based cognitive abilities, but show decision-making deficits in the real world, which may be related to adolescent emotional control and peer pressure; and that older people's cognitive abilities based on tests under laboratory conditions are worse than those in the real world that relies on their experience.

When the task is cognitively demanding, the age and decision-making ability of adults are often negatively correlated, while when the task requires more experience, the decision-making ability may not be affected or may improve with age. In other words, the cognitive ability of adolescents may be affected by emotions and lack of experience for decision-making, while the reduced cognitive ability of the elderly is compensated by their experience, because when cognitive burden needs to be loaded, the decision-making ability of the elderly is reduced. Indeed, we found that in routine decisions, such as buying groceries and cooking, middle-aged and elderly people did not show a trend of declining decision-making ability; but if a new decision requiring cognitive participation appears, middle-aged and elderly people show a reaction of declining decision-making ability. Although adolescents maintain a high level of cognitive ability, cognitive ability does not represent the dimension of knowledge. Lack of experience and knowledge and cognitive decisions influenced by emotions will cause young people to make irrational decisions.

Despite the problems with external validity of decision-making tasks, there is growing evidence that better decision-making on seemingly unrealistic experimental tests, such as paper and pencil learning, is causally related to poor real-world decision-making. Because decision-making is often viewed as a cognitive exercise, few studies have examined the relationship between decision-making and cognitive abilities. Individuals who perform better on measures of fluid cognition and executive function do appear to be protected from common decision-making biases, such as overconfidence and the framing effect.

The content of measuring decision-making ability includes: risk perception consistency (perception of risk and actual consistency), avoiding sunk costs, avoiding framing effects, using decision-making rules, underconfidence and overconfidence. Because decision-making ability reflects a mutually supportive skill set (or positive aggregation), the combination of decision-making skill sets may be different in different tests as long as different decision-making tasks comprehensively involve the main processes of decision-making (belief evaluation, value evaluation, integration, metacognition). Even after controlling for cognitive ability, the overall decision-making ability score is still related to better cognitive ability and fewer maladaptive risk-taking tasks, indicating that the connection between cognitive ability and decision-making ability has good external validity. In other words, good cognitive ability represents the possibility of good decision-making ability.

In the study of adult decision-making ability, the validity of decision-making ability and the total test score are significantly correlated with the individual's cognitive ability, socioeconomic status, and cognitive style. Most importantly, individual decision-making ability is significantly correlated with avoiding negative decisions. In other words, if individuals with high levels of cognitive ability often avoid negative decisions, then such individuals will have better decision-making ability; in other words, individuals with good decision-making ability usually have good cognitive ability and the ability to avoid risky decisions.

Neuroeconomics – Decision-making skills develop throughout life

Individual and environmental characteristics shape the decision-making process, which in turn leads to specific decision outcomes.

Decision-making ability depends on fluid cognitive abilities, which continue to improve until adulthood and then decline with age, while experience and emotional maturity also increase with age.

Previous article: The decision-making process - belief assessment, value assessment, integration, metacognition. Its normative theory and common human biases.

1. Antecedents – Directly related pre-decision factors

1. Fluid IQ

Personal ability, other personality traits, and environmental characteristics are possible factors that affect decision-making ability. Individual abilities include fluid cognitive ability, which is related to better decision-making ability. The low correlation between fluid cognitive ability and avoiding sunk costs indicates that avoiding sunk costs requires low cognition. We can observe from some phenomena that people with high IQs may be more prone to depression, more likely to dwell on the past, and more likely to try to recover from a defeat; but experience tells the elderly that acknowledging sunk costs is a better choice, so people with high IQs often show indecision and entanglement in failed emotional investments or other sunk costs, which leads to poor decision-making.

The ability reflected in the decision-making task shows that the low correlation with fluid cognitive ability may require experience-related knowledge, that is, how to perform the task or emotional regulation skills to prevent incorrect emotional reactions. This is consistent with the research on adolescents - fluid IQ is not the only factor affecting decision-making, it should also include other factors, such as emotional control, knowledge in specific fields, experience, etc.

2. Crystal IQ

Crystallized IQ is a type of knowledge and skills acquired through training or from age-related life experiences. Research on other aspects of individual ability is relatively limited because there is a lack of valid measurement methods compared to fluid cognitive ability.

Age and vocabulary (size of the mental lexicon) have been used as proxies for crystallized intelligence. Crystallized IQ has shown a positive correlation with sunk costs. Older adults, as more experienced decision makers, may have developed effective heuristic strategies that reduce cognitive complexity in their decision making. As mentioned above, the ability to handle irreversible losses and having better emotion regulation skills may be associated with better sunk cost decision making.

We can see that experienced seniors like Munger have their own unique heuristics: thinking models. They use mathematical and logical tools such as reverse thinking, normal distribution, power law distribution, positive and negative feedback, transition probability, network model, system model, game model, etc. to inspire the elements of specific decision-making scenarios. These thinking models are related to crystallized IQ.

3. Emotional control

Many theories of human information processing point to two essentially different but interconnected processing modules. One module is relatively fast, automatic, effortless, association-based, concrete, and emotional processing. The other processing module is considered to be relatively slow, controlled, effortful, rule-based, and abstract processing. System 1 is sensitive to the perceptual similarity of features in the environment, and information processing is based on the extent to which its meaning can be integrated into the individual's perceptual reality; while System 2 is based on abstract, logical, rule-based reasoning.

Deliberative processing comes after emotional processing, and it is well known that emotional decisions often lead to errors. However, neuroscience research shows that deliberative processing and emotional processing are dually dissociated, and they activate different brain regions. Emotional processing seems to be essential in completing experience-based decision-making tasks. But emotional control can reduce the framing effect.

The core concepts of cognitive control are emotional inhibition and working memory. Inhibition is described as the ability to inhibit reflexive reactions, and working memory is described as the ability to retain and process relevant information. Emotional control is particularly important when the outcome of a decision may not be consistent with expectations, because if there are probabilistic outcomes, then the decision depends on learning rather than expectations. Therefore, emotional control is very important in the decision-making process.

4. Other causes

Personal traits may also have an impact on good decision making. Age is a component of crystallized intelligence. Other demographic variables include socioeconomic status, with low-status individuals performing worse on decision-making tasks, perhaps because they have fewer opportunities to develop their potential.

Decision-making ability is also influenced by environmental characteristics. Irrelevant factors in the environment can lead to wrong decisions, such as the framing effect, which describes irrelevant variables, and the presentation effect of sunk costs, which selects irrelevant past time and past investments.

Information overload may also cause people to feel overburdened, giving up cognitive efforts and deviating from normative theories, or even falling into choice paralysis or avoiding decision-making. This phenomenon is most common among students, who will avoid the course if they don’t understand it; it is also not uncommon among adults, many of whom are very resistant to new knowledge or “long lectures”.

5. Resource Constraints

Resource constraints, such as time constraints and economic constraints, will force decision makers to adopt faster and more effective decision-making strategies, but sometimes the quality of decisions made under pressure will be reduced. In mathematical models, if the power-law distribution of the relationship between the rich and the poor is described by Markov transition probability, the fixed probability of a poor person becoming rich and the fixed probability of another rich person becoming poor will lead to a power-law distribution, that is, the 80/20 rule. Of these two transition probabilities, the transition probability of the poor becoming rich is particularly important. This is an important concept for reducing the gap between the rich and the poor. However, in fact, because the base number of the poor is large, the probability of the rich becoming poor is actually greater. Both of these transition probabilities reflect the relationship between decision-making and pressure. Whether it is the poor or the rich, as long as they are subject to resource constraints, such as time constraints, they will make wrong decisions. For example, the poor are more likely to be short-sighted and not make long-term investments due to resource constraints, while the rich are more likely to consume and invest irrationally due to time or cognitive resource constraints.

Obviously, these environmental characteristics may interact with individual characteristics. As mentioned above, emotional control, reducing working memory load - helping decision-making by training working memory capacity, developing personal potential, familiarizing the environment to help individuals apply their experience, and improving crystallized intelligence - the capacity of the mental lexicon, are all key elements to help individuals improve their decision-making ability.

2. Process

The use of a particular decision process may be determined by decision-making ability and decision-making style. Decision-making style may affect the tendency to use a particular strategic process. For example, maximizing the best option is much better than choosing an option that satisfies the needs of the situation.

The decision-making process - belief assessment, value assessment, integration, metacognition. Its normative theory and people's common biases.

III. Results

Finally, decision outcomes include real-world behaviors, such as health behaviors, investments, and career choices; life decision outcomes, such as better health, wealth, and goal achievement; and emotions, such as life satisfaction, happiness, and life regrets. Validity studies have shown that even after controlling for fluid cognitive ability, participants with better decision-making ability do report more positive self-reported behaviors and outcomes. The greater the decision-making ability, the less regret is experienced, even after controlling for regret-oriented decision-making styles such as maximization tendency.

The model we have given may contain dynamic interactions and feedback loops at each stage. For example, the decision results may lead to changes in the environment, and the environment may lead to changes in the decision. However, good or bad decisions can accumulate experience, thereby changing decision-making ability and decision-making style.

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