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Making business judgments, like forecasting the weather, always entails an element of uncertainty. Sound decision-making about when to spend capital – or, analogously, when to prepare for an incoming storm – requires assessing the degree of uncertainty and gauging whether the benefits outweigh the risks.
Susan Joslyn, researcher at the University of Washington, studies how we make decisions when outcomes are unclear. In a recent article in Current Directions in Psychological Science, a journal of the Association for Psychological Science, Joslyn and co-author Jared LeClerc examine which factors lead to better (or worse) decision-making in uncertain situations.
In one experiment, participants had to choose whether to salt the roads in preparation for a cold night. In one case, the forecast was a 90 percent chance that the roads would freeze. Other times, it was presented as a 10 percent chance the roads wouldn’t freeze. Though these probabilities are identical – a good chance the roads would freeze either way – the participants’ were much more likely to salt the roads in the first scenario.
This represents a classic example of a ‘framing’ scenario – the tendency to react differently when uncertainty is presented as a loss or a gain. This effect may also play a role in decision-making about investments. For instance, investors might be more likely to opt for a venture that has an 80 percent chance of success compared with one that has a 20 percent chance of failure – even though the two investments are equally lucrative.
And in situations like this, people are only receptive to expert advice if the degree of uncertainty is provided. As the researchers explain, providing estimates of uncertainty – say, a 20 percent chance that an investment will flounder – instills trust, making clientele more likely to follow expert advice. This may suggest that counsel from an expert stockbroker only gets through to a potential investor if the risks and rewards are explicitly stated.
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