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When it comes to decision-making, John W. Payne, of Duke University, believes we are living in a “Dickensian time.”
One often cited popular truism has it that Sunday’s New York Times contains more information than a medieval peasant would have encountered throughout his entire life. French economist Georges Anderla once offered calculations that incidentally added flesh to this barebones claim.

He estimated that human knowledge had doubled between 1 AD and 1500. It doubled again by 1750 and again by 1900. According to Anderla, the doubling then took place at an ever faster pace, with the next occurring after 50 years, then 10, then seven and finally six years, leading up to 1973 – the year he conducted his work. By then, claimed Anderla, the amount of human knowledge in 1973 was 128 times greater than in the year 1 AD.

By the late 1980s, information theorists claimed information was doubling every 18 months. And this was before the Internet made itself felt as a mass phenomenon and began growing at a rate exceeding any previous technology in history. Given unprecedented access to information, you may expect people to have become wiser decision-makers. After all, there is a widely held belief that more information always improves decisions. Not necessarily so, says John Payne.

When it comes to decision-making, he argues, echoing the introduction to Charles Dickens’ A Tale of Two Cities, we are living in “the best of times and the worst of times.” He acknowledges that many individuals have increasing freedom of choice and increasing amounts of information on which to base decisions. “But, I believe that the wealth of information available today for decision-making can actually lead to a state of ‘information overload,’” Payne says. “For many people, a wealth of information may lead to more confusion than clarity, and consequently having too much information can sometimes feel like the worst of times when it comes to making decisions. Furthermore, as a result of information overload, the potential exists for us to enter an age of foolishness in decision-making, not an age of wisdom.”

“The potential exists for us to enter an age of foolishness in decision-making.

John Payne

Payne, Professor of business at Duke University as well as in psychology and neuroscience, quotes Herbert A. Simon, a founder of behavioral economics, who once noted we may have a “wealth of information” that is creating a “poverty of attention.” The scarce resource for good decision-making was not information, argued Simon, but rather attention. How people allocate this scarce resource can lead to poorer, not better decisions.

Everyone is familiar with the difficulty of making decisions related to health, retirement and wealth management where the options are unfamiliar. It is not that information is lacking, it is often that it is too much, the sources too varied and the advice conflicting. Even a simple task like choosing a cell phone can seem overwhelming in terms of the information available.

As a result, says Payne, people respond by simply deferring a decision – or avoid making one at all. Other decision-avoidance strategies include staying with the status quo or default option. People also cope with information overload by changing how they process information. There is, Payne notes, an increase in the use of simplifying heuristics that either use less (not more) information, or use information in less exhausting ways.

This is not necessarily a poor strategy when faced with a sea of information. Simple strategies can often perform remarkably well as tools for decision-making. The secret is to focus attention on the information most relevant to your decision. “Unfortunately, attention resources decline over time and too often the information we focus on is driven by what just happens to be most salient in our environment. That is, we look at what is easiest to process, not what is the most important information for the decision at hand,” he explains.

The notion that selective attention to information is both a bottom-up (stimulus-driven) phenomenon as well as a top-down (goal-driven) phenomenon was strongly argued by Daniel Kahneman. For Payne, the following question is, given this, how can we address the problem of information overload?

One implication is that in a world characterized by increasing amounts of information, choice architecture in the form of smarter default options will matter more, not less. In addition, people will increasingly delegate decisions to someone else, such as family, friends or maybe even an expert. However, while Payne strongly believes information should be made available to every decision-maker, he also sees a need to aid people to make wiser choices by helping them avoid information overload. He suggests there are two specific tools in the behavioral finance decision-making toolbox that can help people better manage their scarce attention resources. One solution stems from Cass Sunstein, head of the Office of Information and Regulatory Affairs in the Obama administration.

Sunstein recently wrote a memorandum to heads of executive departments and agencies saying that information disclosure, while one of the chief tools to improve consumer welfare, must be designed in recognition that people “have limited time, attention and resources for seeking out new information.“ “In fact, I would go further and offer the ‘affective ease’ principle for the smarter disclosure of information,” says Payne. This principle states there must be affective fluency as well as cognitive fluency in the presentation of information.

“What I mean is that when people look at a piece of information, they must be able to quickly judge whether it suggests something good or something bad from the perspective of their values. If people cannot quickly assign an affective value to a piece of information when making a decision, I believe that they will tend to neglect that information.”

However, there will always be situations where information is presented in ways that are neither cognitively easy to understand nor affectively easy for the decision-maker. How should the decision-maker handle this? A key concept from Decision Theory is that information only has value to the extent that it helps you make a decision. And, making a decision is only a means towards better achieving your objectives in life. So, says Payne, before dealing with a sea of information, the individual first needs to decide where they want to go; they should identify their objectives for the decision.

If you don’t know what you want in a particular decision, Payne says your initial effort should be to find out. He suggests a simple three-card thinking aid. Imagine that you have three cards – one gold card, one silver card and one bronze card. “For example, imagine you are trying to decide how best to manage your retirement savings,” explains Payne. “Now write down on each card one, and only one, objective or goal you are trying to achieve by making the decision. The colors are intended to help you prioritize goals in descending order, but the important thing is to capture what is important to you. “There are no right and wrong answers, but identifying what is important to you should help focus your scarce attention on the information most relevant to your decision-making. And, importantly, not get confused by unimportant information.”

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Published by PROJECT M in March 2012 in Leading Thoughts, Cover image by GOZOOMA classic
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