Intuitive or rational decision making system?

This text is a continuation of a mental model decision-making system. If intuitive and rational decision-making systems are something new to you, I recommend you to read about them from here before reading this text. Even though these systems work together all the time. One of them is the most dominant one all the time. These moments can be divided into two: task-oriented and state-oriented selection of the decision-making system. When your intuitive system is working, it is implementing the instructions from your rational system. The main source of these instructions is the results of the deliberate choices and existing beliefs that your rational systems have made before.

Task-oriented selection

The intuitive system delivers simpler tasks than a rational system. It also reacts to any existing threats and does simple calculations. It also brings practice into expertise in situations where you use your automated skills. Some of the tasks are:

• Easy calculations
• Reactions to threatening situations
• Orientation to perceived changes in the environment
• Read and produces simple sentences
• Creative tasks
• Tasks that are within your areas of expertise and have time constraints
• Habitual tasks

The rational system delivers harder tasks like hard calculations, chooses were to put your attention and learning new things. Some of the tasks are:

• Complicated calculations
• Keeping attention on the task at hand
• Searching memory to identify a sound or sight
• Thinking about the validity of an argument

When you have directed your attention to a complicated task, disturbances can direct your attention to another situation that requires your intuitive system. In this case, the intuitive system decides what to do.

State-oriented selection

What I mean by state-oriented selection is that you are more likely to use an intuitive system, when your physical, emotional, or mental states aren´t optimal for using a rational system. The question is not when the intuitive system is working. It is why it is working. All the aforementioned states are connected. It is hard to separate them. So, I am not separating them from each other. When you have to decide things fast and have no expertise, you use your intuitive system to get the right answer. When you are stressed, you will likely use your intuitive system. When your attention to something is strong, a distraction can change your state and stop your rational system from working. If you aren´t sure of what to do, your intuitive system decides for you.

When you are hungry, or you are dehydrated, your intuitive system is working for you. It is more likely working also when your glucose level isn´t optimal. It can be too high or too low. It matters what you ate and when you did it. Keeping your glucose level at an optimal level to make rational decisions isn´t easy. You can also have decision fatigue. When you have made too many decisions without stabilizing your glucose level, your internal states aren´t optimal for making decisions. If you haven´t slept enough and feel tired, your intuitive system is doing the decisions. All these aforementioned things affect your willpower. Low amount willpower is one of the most common reasons why your intuitive system makes decisions when it would be wiser to use the rational system. You are more likely also using the intuitive system when you are in the slump-phase of your daily cycle.

One last thing. The rational system dominates when the intuitive system is off. Although these systems work together, one of them is usually the dominant one.

Until next week,

-TT

Pareto´s law (80/20 rule)

Pareto´s law is a power law. You probably know 80/20 rule, but may have never heard of Pareto´s law. It is the same law. Pareto was an Italian social scientist who first noticed that 20 percent of the Italian population owned 80 percent of the assets in Italy. The inverse was also true, 80 percent of the people owned 20 percent of the assets. In reality, this rule should be restated. The better way to describe it is to say that ”A high proportion of effects come from a low proportion of causes or effort. For example, a small proportion of employees create the most added value to the company and its clients. 80/20 proportion can also be a 1/50, or 30/70, and other proportions. One of the most extreme proportions is that only a few percents of authors that write books sell almost all the books from the total amount of books sold.

Pareto´s law in human endeavors

A small proportion of employees add much more value than others. In simple tasks like machine users or employees in simple office work, the best one percent of the employees are three times more productive than the least productive one percent. In a little bit harder tasks like in retailing or mechanics, the best one percent are twelve times more productive than the last one percent. In the hardest occupations like insurance salesmen, sales negotiators, doctors, and lawyers, the most productive one percent were compared with average employees. The most productive one percent was twice as productive as an average employee. The biggest difference was between the best one percent of programmers and the average programmers and they were twelve times as productive as an average coder. Working with these people is one of the best ways of becoming more productive. If you are an employer, you have to pay these people a lot more than for average employees.

In business, a small number of products and clients can produce the most sales, profits, and losses. There are many examples, like Apple. Iphones bring the most profits and sales for the company. Apple has also many other products and other services. Many businesses have only one big client. When its business goes south, the subcontractor goes bankrupt. If you work for this subcontractor, your job is not as safe as a job in a business that has many clients. If this job is your only source of income, you might be in trouble, unless your expertise is needed elsewhere.

In investing, a small proportion of your investments bring you the most of your investment returns. And a small proportion of your investments bring the most of your losses. It is hard to know which investments bring losses in advance. Most people expect returns in all of their investments. This is a very unlikely turn of event. Only liars can do it. Beware of investing in businesses that have only one big client. When things go south you lose most of your money or all of them. Pareto´s law doesn´t only work with personal investing, it also works in stock indices. Most of the returns from stock indices come from a small number of stocks. And also most of the daily fluctuations have a small effect on indices. This means that few daily fluctuations have the most effect on stock indices.

A minority of your actions take most of your daily time. For example, you work approximately eight hours, sleep approximately from seven to nine hours, and watch television and spend time in social media both take a few hours a day. These actions take most of your time and the majority of actions like eating, exercising, commuting and other small tasks take a minority of your day. Most of your work effort goes to a minority amount of tasks, most of your time watching television goes to few numbers of channels or a few numbers of shows.

Some problems in using Pareto´s principle

Pareto´s principle is not easy to use. Most of the time you don´t know which efforts produce most of the results. Without the right measuring sticks, you can´t know. And it is hard to forecast which actions are crucial to get the best results. You need too many data points to forecast the future when Pareto´s rule is working. For example, according to Nassim Taleb, you need 10^15 data points to have any chance of understanding how these power laws like 20/80 rule work. You have to use a constant trial and error learning for a long time to achieve any meaningful results.

-TT

Changing systems

Do you ever wonder why:

• A new political party in power doesn´t change anything for the people?
• Great and successful new CEOs cannot change the directions of the poor businesses when they are in crisis?
• All the newspapers yell ”We are doomed” when the world is a better place than before in many ways?

All these things happen because of the systems around you. You cannot change the system easily. And there are better and worse ways of improving systems. Before going to details, I recommend you to read the basics of systems from here if you are not aware of them. Let's keep things simple and focus on the most common and central components of the system: different elements of the system, interconnections between the elements, and the goal or purpose of the system. There are more components like feedback loops, but let's forget them this time. Some things are wrong when the aforementioned lunacies happen. This doesn´t mean that the system isn´t working. It means that the system isn´t working in a way people think it should work.

If your interconnections and the system´s purpose or goal don´t change, changing the system´s elements don´t change much how the system functions. You can change all the members of the parliament, members of the parties, reporters, and the board of directors in companies, but the functions of the systems stay the same. It doesn´t matter who you are or what you have done before, or how intelligent you are, the most probable results stay the same as before.

Changing the interconnections of the system brings more changes. When you change the interconnections, you change the elements, too. No dog will bite its master´s hand if he feeds it. And no employee will work against his employer´s will unless it happens by accident. The same happens with politicians. They won´t act against their financiers in the parliament. This can be seen anywhere in the world where politicians get money from other sources than their bank accounts. You may wonder why they aren´t working for their voters in the parliament? You have to ask a question: ”Which comes first, the money for ads before the elections or the votes? Great CEOs cannot work wonders with poor business models or bad products. When the poor business models have poor interconnections with a company´s clients or poor interconnections are in between the company and its departments, the direction of the company doesn´t change. Poor results stay poor.

The last but the most important component is the purpose or the goal of a system. It is also the single most important component for a well functioning system. It is not the most important thing for a system. The most important things are the mindsets behind the system´s different components. But let's forget them this time. Everybody has to understand that the stated purpose or goal of the system is not the real goal or purpose of the system.

For example, the purpose or the goal of parliament is not to take care of the voters´ interests in many countries. This applies to most of the countries, including the United States, Russia, and Finland. If you listen to politicians, they always talk about the importance of taking care of the voters´ benefits. If you look at the result, you notice that this doesn´t happen often. Most insanities that businesses do are because their purpose is to take care of their directors´ benefits or their owners´ benefits. The latter happens, for example, when companies work unethically. If you think about the newspapers, you can see that they sell with fear. Everything is always dangerous, or something isn´t working well. It is hard to see any positive news titles. Fear sells and newspapers sell-by inducing fears into your brain.

Do not blame people for the systems. They have only very limited effects on how systems work. Corruptive systems don´t change by changing elements. Non-functioning systems can have flaws in their design. They can move their interconnections and purposes slowly into wrong directions. Long-term socio-economic cycles are the results of the slow changes in systems in the wrong directions. We live in one such time. Something drastic will happen because corrupted systems always get destroyed. I have no idea what is going to happen, but I am wrong if something drastic won´t happen in the next ten years in Western countries.

Until next week,

-TT