Heuristics or cognitive biases?
We marketers mostly think of the dual system theory in the context of how consumers make decisions. Often marketing erroneously believes that consumer is spending a great deal of time and effort in perusing our marketing communications and evaluating the product options before them through an elaborate system 2. However, research into consumer behavior suggests that consumers mostly use the quick and intuitive system 1 to make their choices.
Apart from the obvious marketing perspective, we can also think of the dual-process theory in the context of how we as managers make our decisions. We too often go by gut feeling and employ shortcuts and heuristics to simplify our choices and the choice-making process. However, what may be a useful heuristic for selecting a brand of a floor cleaner for the consumer, may turn out to be a costly cognitive bias for making a multi-million investment decision. Heuristics and cognitive biases are, of course, two opposite sides of the same decision rules, which may simplify our lives but also lead us to stupid and expensive errors.
System I and System II errors
Most people will be familiar with the type I and type II errors from statistical testing. Type I error is the error of concluding that the observed difference is significant when it is not. And Type II error is the error of concluding that the difference is not significant when it actually is.
I present a behavioral science version of these errors. Type I error is when you rush to make your decisions through system 1, when actually, you should be deliberating using system 2. And Type II error is when you waste your resources in using the expensive system 2, when system 1 would have easily and painlessly led to the right choice – in fact sometimes even a better choice.
As Daniel Kahneman says in his book, “Thinking, Fast and Slow,” system 2 is lazy. Most of the time it is happy to be a bystander, letting system 1 to do the heavy lifting. For the majority of choices, we need to make, this laziness actually serves us well. Even if intuitive, system 1 led decision-making does not lead to the optimal decision, quite often the cost of a sub-optimal decision is very low. In such a situation, the resources and the effort required to mobilize system 2 and do a detailed analysis is futile.
Type I and Type II decisions
Jeff Bezos, the founder of Amazon, alluded to a similar principle while differentiating between type 1 and type 2 decisions. According to Bezos, “Type 1 decisions are not reversible, and you have to be very careful making them”. These are decisions, therefore, which require careful deliberation and analysis, and the power of the careful and analytical system 2. Type 1 error will occur if you rashly make these irreversible and costly decisions through system 1. On the other hand,” Type 2 decisions are like walking through a door — if you don’t like the decision, you can always go back.”
It is clear that while from a marketing point of view, it is essential to understand how the consumers use their two systems to make brand choices, as a business executive it is equally critical to introspect and deploy the right system for the right type of decisions.
Ashok.sethi@behave-consulting.com
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