- Q1: Who made the bad decision?
- Q2: Did they have enough information to make a good decision?
- Q3: And the incentive to do so?
- S1: Let someone else make the decision, someone with better information or better incentives.
- S2: Give more information to the current decision-maker.
- S3: Change the incentives of the current decision-maker.
The economist has an article on the history of this problem:
In business and finance, this is known as the “principal-agent” problem. Shareholders employ managers to run a company; investors use fund managers to look after their savings. That makes sense. It allows us to take advantage of the expertise of others, and of economies of scale in fund management (it costs little more to look after $10m than $1m). But it is extremely hard to align the interests of principals and agents exactly.
To spoil the ending, the solution is always "it depends."
It would seem that a missing piece of the problem-solving framework described by Froeb, McCann, Shor, & Ward (2016) is the emotional component of making a choice. “Emotions are no longer seen as merely disruptive, they now are seen as playing a central role, sometimes complimenting deliberative thought and at other times overwhelming it” (Beach & Connolly, 2005).ReplyDelete
Buttonwood (2017) mentions trust as the element that links business, finance and politics, suggesting that “once our relationships with our agents are more remote, and our transactions more complex, we have to rely on incentive schemes and these are ripe for exploitation”. What’s interesting, however, is how these “agents” attempt to connect emotionally instead of using overt facts and figures. Commercials for products, politicians and financial advisors all rely on making this connection, sometimes eschewing facts for a good soundtrack and earnest actors.
One trap to for decision-makers to be mindful of, especially when considering emotions, is the “sunk cost tap” – “the error of treating non-recoverable earlier expenditures as though they are part of a later decision” (Beach & Connolly, 2005). Unfortunately, at least from the perspective of these kinds of decisions, humans are emotional creatures. Understanding how to pinpoint this behavior is key.
Maybe there should be a fourth question added to the problem-solving framework: “What emotional state/mood was the person in when the bad decision was made?”
Beach, L. R., & Connolly, T. (2005). The Psychology of Decision Making. Thousand Oaks, California: Sage Publications.
Buttonwood. (2017, February 13). Retrieved February 19, 2017, from Who guards the guards? The problem that links business, finance and politics: http://www.economist.com/blogs/buttonwood/2017/02/who-guards-guards
Froeb, L. M., McCann, B. T., Shor, M., & Ward, M. R. (2016). Managerial Economics: A Problem Solving Approach. Boston, Massachusetts: Cengage Learning.