According to the Handbook of Evolutionary Psychology, a cognitive bias refers to a systematic pattern of deviation from rational judgment, where an individual draws inferences about other people, groups and situations in an illogical fashion. A subjective reality is created from their perceptions, which in turn dictates the individual’s behavior. Thus, “cognitive biases may sometimes lead to distortions in perceptions, erroneous judgments, illogical interpretation, or what is broadly called irrationality” (Haselton, Nettle & Andrews, 2005).
While developing leaders for organizations all over the world, I have come across hundreds of cognitive biases that have decreased the performance of individuals and teams, led to bad business decisions and created failed change efforts.
This series will discuss some of the most common biases that I have encountered, the emotional configurations that create them, and how I used Emotional Intelligence to empower leaders to battle them.
The Allais Paradox and the Certainty/Pseudocertainty Effects – This paradox refers to a breach in decision theory and contains the Certainty and Pseudocertainty Effect biases. The Allais Paradox is named after French Economist Maurice Allais who served as a major inspiration to Kahneman’s eventual work in cognitive bias. He described in a 1953 paper that an individual’s decision making can be inconsistent with expected utility theory (the theory that individuals will choose the course that results in the highest expected utility or outcome). To describe the paradox, consider the following, where participants are asked to choose between the following scenarios:
Experiment 1: Choose between:
A) $1 million for sure
B) 10% chance of receiving $5 million, 89% chance of receiving $1 million, 1% chance of receiving nothing
Experiment 2: Choose between:
C) 11% chance of receiving $1 million, 89% change of receiving nothing
D) 10% chance of receiving $5 million, 90% chance of receiving nothing
The expected value for option A is $1 million and for option B is $1.39 million. As expected, most participants chose option A within experiment 1, despite the lower overall mathematical value. Kahneman and Tversky would eventually label this the Certainty Effect, where people tend to prefer certain outcomes despite higher value in a different scenario, even if the risk of no value is as small as 1% (Kahneman & Tversky, 1979). This suggests that people give extra value to scenarios that are totally absent of risk. In experiment 2, if similar decision-making processes as experiment 1 were followed, participants would prefer option C, but in the study, most participants chose option D. In the first experiment, the less risky choice was preferred over a higher expected utility, while in the second experiment, a higher expected utility was preferred over the less risky choice ($0.11 million expected utility in option C and $0.50 million expected utility in option D). Allais essentially proved that decision making under risk violates the expected utility hypothesis. This is what Kahneman and Tversky labelled the Pseudocertainty Effect, where although people prefer certainty over uncertainty, if the scenario is described or approached differently, individuals will prefer or ignore the uncertainty that was previously rejected in a preceding scenario. In multi-stage decision making, those falling victim to the Pseudocertainty Effect bias often reject the uncertainty of previous scenarios or decision stages when evaluating a later stage, which was evident when those who chose option A then subsequently chose option D.
Essentially, the Allais Paradox proved that humans do not always act in the best interest of maximizing utility or minimizing risk, and that decision-making process can align with certainty or uncertainty, depending on perceived risk, how the question is framed (Framing Effect), and of course, the EI of the decision-maker.
Koçaslan (2014) wrote in the Journal of Neuroquantology in a paper called “Quantum Interpretation of Decision Making Under Risk” that those who experience irrationality, or behave in a “different reality”, often make different decisions under risk than others. This means that IQ, personality, and decision-making theories such as the expected utility hypothesis, do little to predict how one will make important decisions while under risk, because decisions are often made before risk is assessed in our rational brains. EI however, can irradiate irrationality and help those that exist within different realities generate the needed self-awareness to realize that they may be falling victim to this paradox and the biases that dwell within it.
As a coach, you should keep this paradox in mind if the leader tells you during discovery that he or she has received feedback describing an erratic or unpredictable decision-making style, and direct reports are often confused as to project direction or the company vision, since direction seems to “change” often. In this scenario, an EQ360 is vital to discovering the existence of this paradox and the Certainty/Pseudocertainty Effects. Combined with the feedback of possessing a fitful decision making style, you will most likely discover competing reputations that vary wildly across rater groups, and a common EI configuration is as follows:
· Overuse of Decision Making
· Overuse of Independence
· Underuse of Emotional Self-Awareness
· Underuse of Impulse Control
Leaders with this EI configuration find it too easy emotionally to make decisions and often do not feel the emotional pressure that comes from risky decisions. Combined with an inability to delay those decisions, the Allais Paradox has an environment to thrive. Leaders will often be independent of the emotions and input from others, while simultaneously lacking in the emotional awareness to realize it. Like with all other configurations that contain underuse of Emotional Self-Awareness, raising this EI skill is paramount and should be considered your first coaching task. Have the leader keep a decision diary for an agreed upon timeframe, and when they are jotting down important decisions that involve risk, make sure they also capture what emotional factors led to that decision. During each coaching session, discuss the decisions in the diary, the perceived risk of the decisions and what emotions led to them, and any outcomes of those decisions.
Allais, M. (1953). Le Comportement de l'Homme Rationnel devant le Risque: Critique des Postulats et Axiomes de l'Ecole Americaine. Econometrica. 21 (4): 503-546.
Bar-On, R. (2002). EQ-i Technical Manual. Toronto, Canada: Multi-Health Systems.
Haselton, M. G.; Nettle, D. & Andrews, P. W. (2005). The evolution of cognitive bias. In D. M. Buss (Ed.), The Handbook of Evolutionary Psychology: Hoboken, NJ, US: John Wiley & Sons Inc. pp. 724–746.
Kahneman D and Tversky A. Prospect theory: An Analysis of Decision under Risk. Econometrica 1979; 47: 263- 292.
Kelley, H.H. (1967). Attribution theory in social psychology. In D. Levine (Ed.) Nebraska Symposium on Motivation, Lincoln: University of Nebraska Press
Koçaslan, G. (2014). Quantum Interpretation to Decision Making Under Risk: The Observer Effect In Allais Paradox. Neuroquantology, 12(3), 412-418. doi:10.14704/nq.2014.12.3.776