WE RESIST RIGOROUS ANALYSIS

The Nobel Prize–winning economist Daniel Kahneman pointed out that even if we take the time to analyze something, we tend to stay on the surface in our analysis and come to quick, erroneous conclusions because of the problem he identified as the “Law of Small Numbers.” We tend to take a few inputs and then make huge leaps in our judgment and fake ourselves out to think that we’ve properly analyzed the situation. We rarely spend the mental effort to really analyze a situation, much like how we tend to hate to learn math because it is mentally grueling.5

THE MORE EMOTIONAL THE EVENT IS, THE
LESS SENSIBLE PEOPLE ARE

Kahneman describes the two-system theory of emotional vs. rational decision making as follows:

Many of us who study the subject think that there are two thinking systems, which actually have two very different characteristics. You can call them intuition and reasoning, although some of us label them System 1 and System 2. There are some thoughts that come to mind on their own; most thinking is really like that, most of the time. That’s System 1. It’s not like we’re on automatic pilot, but we respond to the world in ways that we’re not conscious of, that we don’t control. The operations of System 1 are fast, effortless, associative, and often emotionally charged; they’re also governed by habit, so they’re difficult either to modify or to control.  

There is another system, System 2, which is the reasoning system. It’s conscious, it’s deliberate; it’s slower, serial, effortful, and deliberately controlled, but it can follow rules. The difference in effort provides the most useful indicator of whether a given mental process should be assigned to System 1 or System 2.

He goes on to explain the problem with why decision makers rarely delve into System 2 thinking:

OPTIMISM IS A SOURCE OF HIGH-RISK THINKING

 Emotion becomes dominant. And emotion is dominated primarily by the possibility, by what might happen, and not so much by the probability. The more emotional the event is, the less sensible people are. So there is a big gap. He also pointed out the real problem of optimism that we see so much in entrepreneurs and business opportunity sponsors: One of the major biases in risky decision-making is optimism. Optimism is a source of high-risk thinking.

5http://www.strategy-business.com/article/03409?pg=all