Michael Baldwin puts the decision-making ability of fund executives in an evolutionary context.

Superannuation fund executives and investment managers make challenging decisions every day. They must regularly decide how much to rely on research or apply their experience and gut instinct. These choices have become particularly complex in light of the financial crisis and market downturn of the past few years, and the poor investment returns from many super funds.

Do we all share some responsibility for making bad judgments? Professor Jill Klein from the Melbourne Business School has examined decision making from a social and evolutionary psychology point of view.

She believes our brains developed over millions of years for a world very different to the one in which we live today. “Our brains evolved for the savannah; our hunter-gatherer ancestors had to make very quick, simple judgments with strong emotional reactions,” Klein says.

“We’re working with those same brains today. Cultural evolution has happened much faster than biological evolution could catch up.

“As a result, we can’t hold in our heads all the information we need to make sound business decisions. So we take cognitive shortcuts. These sometimes lead to the right decision, but they can also lead us into cognitive biases.”

 

Cognitive biases

 

One of the most prevalent biases is over-confidence bias: our tendency to think we’re right more often than we are, or that something is going to work when it isn’t.

We are also susceptible to framing bias: the way an issue is presented to us, or how we frame it for ourselves, affects the parts of the problem we look at and the parts we miss. For example, we might look at an investment in terms of how much it will gain, and ignore the possibility that it could lose value.

Anchoring bias is our tendency to remember a number we’ve recently heard and form judgments on the basis of that number. “If I spun a roulette wheel and the number 12 came up, and I asked you a bit later how many weeks it would take to finish a project, you’d likely guess a number around 12,” says Klein.

“You can have a number in your head and forget how it got there. As a result, we can be anchored very falsely to random, irrelevant numbers. Or they can be relevant numbers, such as last year’s figures, but we don’t adjust far enough from them.”

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