Decision making with imperfect information – cognitive-emotional integration
Katrina Wang UA 27 and Jim Stellar
Katrnia and I met when she took my introductory psychology course in the spring of 2024. I found her interest in psychology to itself be interesting as she was a business student, focusing on eventually getting a Masters in Forensic Accounting. What got us talking was decision-making after I presented the 2002 Nobel Prize winning work of Daniel Kahneman, who was a psychologist.
What got me about Kahneman’s work was that he described thinking on two levels: cognitive and emotional. I thought that was highly relevant to business as he worked with economic science. He integrated his work into human judgment under uncertainty. As cited by the NYT in 2011
How does this Kahneman thinking impact your life as a business major?.
Kahneman’s award winning “prospect theory” (see below) refers to the way that people act in the face of uncertainty. There are 2 systems, system 1 is fast, intuitive, automatic, and even unconscious, it’s our default biases that are our knee-jerk reactions to things. System 2 is the slower, more deliberate, and analytical other half, one that takes concentration to manifest.
Prospect theory applies to all aspects of life, be it determining what job to commit to, career options, especially on the more micro level of the individual’s professional career trajectory, but also the macro scale of how a nation’s economy may function.
It’s the theory that a gain in $100 feels less than a loss of $100, how a 30 minute detour in traffic would upset you significantly more than if you had arrived an hour early. Does a thousand dollars feel insignificant once you’re a millionaire? Would the loss of $100 even bother you if you had that much wealth? Do things even matter when they’re on such a scale?
This is the most interesting and thorough discussion of Kahneman’s work that I think we have ever had in this blog series. It is particularly interesting to me that your discussion of it came through the lens of business operations, particularly today with all the volatility. One more time, maybe it takes the real-world application to open up the depths of a concept like prospect theory.
We decided to keep this blog brief and come back with more repeated analysis of some of the core principles of this blog series as refracted through KW’s pursuit of business school studies.
