Why it's impossible to be rational about anything: measuring decision-making factors' potential for rational analysis

One of the problems with making decisions rationally is that it's conceptually impossible. Behavioral economist Dan Ariely highlights this by examining the decision-making process of someone faced with two coffee shops across the street from each other, one featuring handcrafted roasts and the other a standard chain where the coffee is $1.75 cheaper:

What you should do (if you wanted to be rational about it) is consider all of the things that you could buy with that $1.75, now as well as in the future, and decide to buy the expensive coffee only if the difference between the two coffees is more valuable than all of those other possibilities. But of course this computation would take hours, it is incredibly complex, and who even knows all the possible options to consider? [The Psychology of Money and Habits]

If you spend some time thinking on the factors that influence the direction of any decision, what you find is that every factor somewhere on a scale from high potential for rational analysis to low potential for rational analysis. Consider, for example, that a puppy's markings have a very low potential for rational analysis when deciding between one of two puppies to take home.

The problem is that even factors like price that fall relatively high compared to puppy spots are still far from being accurate tools for rational decision making. In this case it's because we can't help but make decisions based on context, relying on a memory that's spotty at best to judge the relative value of any monetary amount at any given time (see: How relativity affects every decision we make: an experiment in making $20K worth more than $20K). This is just one rule of human decision-making among a host of others.

Even if one were to accurately measure the various potentials for rational analysis of every factor at hand (impossible), one would then have to accurately compare factors within the overwhelming matrix of results (also impossible).

Our entire complex of heuristics and cognitive shortcuts exists entirely because being rational is simply far too difficult (see: this list of all the ways you could be completely wrong about everything).

How relativity affects every decision we make: an experiment in making $20K worth more than $20K

In the video above and in the his other works, the first point behavioral economist Dan Ariely is always quick to make is that we're horrendously bad at knowing what we want, and when it comes to decision-making we always always always make comparisons, relying heavily on relative context as a way to deal with the overwhelming complexity of most decisions we're faced with (see also: Barry Schwartz's The Paradox of Choice).

The idea behind relative context explains why the highest priced items on a menu boost revenue (even if they are never ordered), and why we're drawn to mid-level options among groups of three or more, using the more extreme alternatives as guides to narrow down 'what we're really looking for.'

As for supporting the idea that we use context to deal with complexity, Ariely points to examples that illustrate the principle "when given the choice between option A, option B, and option -A (similar to A but easily determined to be worse), we choose option A," demonstrating that we tend to focus on things that are easily comparable.  When deciding upon purchasing a colonial home, a contemporary home of the same value, or a contemporary home of the same value with the price lowered because of a roof that needs to be fixed, we forego the more abstract decision between colonial and contemporary for a decision based on the roof instead. The 'Rome vs France vs Rome Without Coffee' and the 'Tom vs Jerry vs Slightly Less Attractive Tom (or Jerry)' examples reiterate the point, illustrated below.

It occurred to me to play on the impressionability of our decision-making with an experiment of my own. My goal was to observe the different decisions made when people were posed with the hypothetical choice between staying in a city they loved (let's say a 9 on a 10 scale) with a job paying a particular salary, or to move to another, less-than-ideal city (7 on a scale of 10) for the same job paying an increased salary. The idea is that given all other things equal, the decision would (read: should) be made based on the increase in salary alone.

To illustrate the importance of local relativity, half of the college students I approached were asked to make the above decision while imagining their first job offer, at salaries of $40,000 for the 9-on-a-scale-of-10 city, and $60,000 for the less-than-ideal city; the other half were to imagine they were well established in their career, deciding between $110,000 and $130,000.

Final result? People are far more likely to stick with their current city when presented with the decision between the two larger sums of money. Why? Relatively, the jump from $40K to $60K is a 150% increase in salary, while the 'established career' decision only yields an increase of less than 20%. Although the difference in salary is objectively the same ($20,000 should be worth $20,000 no matter what, right?), the responses illustrate just how seriously we take relativity.

What I like most about these kinds of experiments is that they can be clearly likened to the 'irrationality as cognitive illusion' metaphor,  bridging the gap between cognitive and visual illusion. Just looking at the graphic representation of the results above you can see it works in the exact same way as the 'which table is longer?' illusion Ariely touches on briefly.

Certainly there are a lot of other factors that naturally influence a person's decision here (both consciously and unconsciously) but really that's kind of the point. Salary and location are the only objective factors on which to support 'rationality' in this scenario; when it comes down to it, we're absurdly horrible at being objective and rational, despite how strongly we might think the opposite.

Utility and cooperation in Prisoner's Dilemmas: dollars and donuts edition

Last week I attempted to pit two volunteers against each other in a staple Prisoner's Dilemma, but my ulterior motives (wanting to give away a book) threw a wrench in the plan, leaving one participant with a free book and a good charity (see: SafePlace) $10 better off. Wanting to truly recreate a "cooperate vs defect" experience, I decided to take a box of donuts down to the local university armed with a sign that read "FREE DONUT (maybe)."

Since my intent was to garner a variety of experiences, there ended up being a few variations of the decision-making game I had in mind. The first group to approach me and my sign was presented with the following rules:

1) In order to win a free donut, you must have and be willing to lose a dollar.

2) To play the game, you must make each separately make a decision between spending the dollar to receive a donut in exchange, or keeping the dollar to get a donut for free at the expense of the other player.

3) If one player decides to spend their dollar but the other decides to keep their dollar,  the person who kept their dollar gets a donut for free, while the person who decides to spend the dollar gets nothing. If both players make the decision to spend the dollar, then both dollars are returned AND both players get a donut. If both decide to keep the dollar, however, no one gets anything.

This sounded about right in my head. I had each player turn their backs to each other, make a decision by either placing the dollar or not in their right hand (placing the dollar in the right hand indicates the 'spend' decision, keeping the dollar in the left hand indicates a 'keep' decision), then turn back around and display their choice in dramatic Rock, Paper, Scissors fashion. As it turned out, the result was that both players decided to spend their dollar, and as promised I gave each a free donut.

After some thought, I realized that the decision I presented them with looks like this:

When looking at these diagrams you want to pay attention to a couple of things. First: individual utility. 

The way it goes in theory is that each player judges the utility of each outcome (represented here by the numbers below each face) and makes their final decision based on whether taking the alternative would yield more utility. Player 1 compares alternative outcomes laterally (relative to player 2's decisions) while player 2 compares thier own potential outcomes vertically. This leads to the ideal outcome on an individual level. Here in this example, there is no functional benefit of switching from the 'keep' option to the 'pay' option; they are both equally beneficial if the other player pays, and you're worse off in the case where the other player keeps.

So going back to the above decision matrix, it's not surprising that this first group ended with a keep/keep 'nothing happens' result. Not very exciting. (Although I did end up giving them free donuts for participating.)

In the end I wanted to orchestrate that contrast between the 'best decision' result and the 'having to settle for something less-than-optimal, but in the interest of being safe decision' result. The second thing that's important to pay attention to is the overall utility, which points at what that 'best decision' would be. By adding the utility of both players' results in each scenario, you can identify which scenario represents what is 'best' overall. In the traditional Prisoner's Dilemma diagram (below), you can see that cooperating leads to the most overall utility (14), although individual utility draws each layer to the least optimal result (overall utility of both defecting: 8) (indeed, this is the crux of the dilemma).

 

I approached the next groups with the same prospect, but instead of having the players potentially spend a dollar of thier own, I gave each one to use for the game. If they both keep the dollar, they both end up a dollar richer. If they both spend, they each get a free donut*. But if one spends and the other keeps, the keeper has to give the dollar back, while the spender keeps their dollar AND gets a donut. The resulting matrix is below:

 

These scenarios were interesting. Applying our game theory reasoning, the result should lean toward spend/spend. But more often than not, I got spend/keep - why? (This is an hilarious result, by the way. One girl, expecting her friend to cooperate for the sake of free donuts, had quite a reaction to his decision to keep the dollar. I had to retrieve my dollar from the ground, after she threw it in the face of her "friend.")

The 'why?' is in the utility. As noted in the asterisk above, *I had to emphasize "free," with the justification that I was giving them a dollar. Which is fine for those  who get the same utility from both a dollar and a donut, but:

1) if a donut is only worth $0.25 to you, the resulting matrix changes entirely, and

2) even if a donut is worth $1 to you, given that you start out with a free dollar, you have to spend that dollar to get a donut. Loss aversion (see: Business Built on Loss Aversion) weighs in heavily here.

The ideal situation is relatively straightforward hybrid of my earlier attempts, but I ran out of donuts before being able to test it. The decision matrix simply needs to look like this:

 

To get here, each player needs to cooperate with the other by paying a dollar (from their own pocket) for the sake of both getting a free donut (the dollar would be returned). The alternative is to not pay; if neither player pays a dollar, no one gets anything. In the split result, the player who pays loses their dollar, while the person who keeps gets a donut AND the other player's dollar.

Again, the expected result is the 'no result' keep/keep, but at least this time they get there in the face of the win/win '(truly) free donuts' result.

[What would your decisions be??]

a quick decision-making game / crash course in Orchestrating Prisoner's Dilemmas

Since I was one of the lucky 500 to get a free signed copy of Hugh MacLeod's Ignore Everybody (And 39 Other Keys to Creativity), I've had an extra one sitting around from my original purchase. Realizing there's some fun to be had here, instead of just giving my extra copy away I decided to play a little decision-making game by drafting a couple of unwitting volunteers for something of a social experiment. If nothing else, the book was going to serve me at least a little entertainment.

The only requirement for my two volunteers before commitment was that they 1) wanted the book, and 2) were okay with the possibility of donating a few bucks ($10) to charity as a result of playing the game. Once they were locked in I explained the rules:

The only thing each player needed to do was make a decision between two options:

Option A - Ask to get the book for free

Option B - Donate $10 to a charity of their choice and send me an email confirmation

Since both players chose between two options (at the same time, and without knowing who their competitor was), I defined the four possible results of the game:

"Scenario 1 - both players email me with a receipt verifying their donation; I match the $10 by emailing each player with my own verification of $5 donation to the same charities. (medium win/medium win)

Scenario 2 - Player A asks for the book, Player B donates to charity. Player A gets the book for free, Player B loses out on the cost of donation. (win big/lose big)

Scenario 3 - Player B asks for the book, Player A donates to charity. Player B gets the book for free, Player A loses out on the cost of donation. (win big/lose big)

Scenario 4 - Both players ask for the book. No one gets anything. (lose/lose)"

Originally my intent was to both give away my free copy and simultaneously orchestrate something of a prisoner's dilemma, that old game theory staple. Of course, the essence of a prisoner's dilemma is that each participant has to chose between cooperation with the other (at the risk of losing out big if the other defects), or defecting for a big reward; if both cooperate, each participant is rewarded moderately (best possible outcome), but if both defect, both face an undesired outcome. The dilemma is that without any certainty of the other player's decision, when each player evaluates the individual utility of potential outcomes of either choice, there is always more utility in either switching to or staying with the 'defect' option - and since both players evaluate the situation accordingly, they both end up in the lose/lose undesired outcome. Allow me to illustrate:

Prisoner's Dilemma

Have you pointed out yet where there's a couple of critical non-prisoner's-dilemma things going in the case of this book experiment? For one, there's not exactly a true "cooperate or defect" dynamic here. The "donate" option isn't inherently a bad thing, in the sense that it's likely to act as a rewarding option for the more charitable among us. And on top of that there's not really any sense of betraying the other player if you donate anyway. The decision ends up being not so much "should I cooperate or defect," but something closer to "which one do I like more: free book, or giving to charity?". With the "win big/lose big" designators I tried to describe the situation as closely to "you have the potential to be screwed over by the other player if they choose the book and you don't" as possible, but ultimately I don't think too many people would be all that discouraged hearing "sorry, a stranger got a free book while you gave money to a good cause (of your choice)." 

Which, by the way, is what ended up happening. Player 1 Libby Anderson gave $10 to SafePlace, a woman's shelter she's been working with alongside Planning For Good in Austin, while book-loving Player 2 Rebecca Stein asked for and got the free book. Interestingly enough though, Libby noted that after missing her response deadline by a week, she opted to redeem her guilt via charitable donation. Meanwhile, Rebecca remarked that it may have in fact been the pressure of the 24 hour turnaround time that drove her selfish type response. But no worries, Rebecca has offered to pass on the book to Libby once she's done. Everyone's a winner. Even from my perspective: I got to give my book away, and got someone to donate a few bucks to a good cause. You guys rock, as always. 

I stepped back and considered this part one of my entry-level course in Orchestrating Prisoner's Dilemmas, and started cooking up other ways to get at that elusive "cooperate vs defect" dynamic. Would my next experiment, making use of college students, dollars and donuts, hit the mark??? Stay tuned to find out.