How do we decide in uncertainty?
My wife asked me to pick a breakfast place for a date. It’s a thing couples with young kids do. I fired up Zomato. Found a Middle-Eastern place that made shakshuka, a favorite. The place was nearby, was reasonably priced, and had a good overall rating. But the customer ratings see-sawed. So I went for another place that served English breakfast, the usual fare. It was rated exactly the same but had more consistent reviews.
Why did I reject what I wanted more (shakshuka) when the ratings were the same?
Avoiding the worst-case scenario is more important to you than you think. It drives decisions where you don’t have complete information. And in the real world, that is pretty much all the time. I didn’t want to stuff up date morning by picking an iffy place. So I played safe. I went with a proxy for quality (consistent ratings). It mattered less how much I would save, how close the place was, or how close a match my cuisine preference was.
You know what played most on my mind and exaggerated my uncertainty? Variance. The shakshuka place had a number of 5-star ratings but also had a higher proportion of poor ratings. The higher variance made me disproportionately fearful. This is loss aversion bias.
Lesson: When life gives us lemons, we pray first that they’re not rotten. We don’t worry if they’re not ripe.
If you’re worried about being swayed more by the fear of loss than the chance of gain, don’t be. It’s practically impossible for us to make a perfectly informed decision. We don’t have the time or energy. Heuristics are all we’ve got and they work just fine.
So what’s the problem, you ask? It is when you let this natural tendency drive all decisions, even the big ones. You don’t need to buy property the same way I picked a place for breakfast. You need to pause. And think of the missing information, that if obtained, could influence your decision. Seek to acquire it, instead of going by heuristics.
I banked on social proofing (experience of other customers) to make my date-morning decision. There are other risk-mitigation strategies you can employ as well. Want to know more about them? Follow me. I post on most weekdays.