FIFTY FOUR DEGREES | 9 ‘ Why managers shouldn’t devalue gut feelings Managers need to understand people as a fundamental basis of their work, at both an everyday tactical level and for developing a vision and strategy. It’s when we are affected by empathy that we are more capable of recognising things that are hidden from us than if we try to use pure rationality. We need to have a grasp on the motives and feelings of others. Emotions can also make those relationships more difficult, making us feel hostility when we meet people who we perceive to be different from ourselves. This is why it’s so important to appreciate how we invoke both rationality and our emotions when making decisions. In this context, rationality allows us to analyse our emotions and gives us answers to the question of why we feel a certain way. And it allows us to be critical when we’re judging our own emotions. We know that the types of decisions that cause the most intensive collaborations between rationality and emotions are ethical or moral considerations, making particular use of the part of the brain called the prefrontal cortex, associated with personality and organising emotions. How fear governs investor choices It’s said that non-professional investors make mistakes because they don’t have the same logical understanding of the complexities of finance systems. But that’s not true; professionals make the same kinds of mistakes, because they both experience the same emotions when making investment choices. One famous phenomenon is the way in which investors are reluctant to sell stocks at any kind of loss, and wait until it turns to profit, even when the loss may be increasing over time. The ruling factor is the fear of feeling regret. For as long as they don’t sell there is no regret, it’s postponed. Similarly, ‘herd behaviour’ among investors; they believe other people have special knowledge - a feeling of safety in a crowd - if the choice is a bad one, it’s bad for everyone, not just me. It’s an instance of when people should be aware of the negative effects of an emotion and a need to behave more rationally. Why getting angry can make you a better negotiator Emotions can create an advantage in negotiation situations: anger allows you to walk out. Even though it might be humiliating and it might be bad for you financially, you do it because of the strength of the emotion. An experiment at the University of California took two groups of people into a lab. Given a sum of money and the chance to negotiate over how it was shared out. One group was made angry, making them re-live experiences that had recently annoyed them. They made the most money. Another study that I co-authored revealed that our inclination to become angered grows in situations in which we can benefit from anger. In other words, there is logic in emotion and often emotion in logic. How we feel literally disgusted by low offers Researchers in economics and psychology have increasingly been using magnetic imaging of the brain in recent years to map brain activity while decisions are being made. The specific regions of the brain that are being used at any given moment are identified using measurements of oxygen consumption. In one study it was discovered that extremely low offers involved in a bargaining game triggered activity in parts of the brain associated with disgust and the vomit reflex. The sense of disgust that accompanies our reactions to insulting offers is possibly part of a mechanism that has evolved to protect us from being exploited for the future. In short, it seems, people are literally disgusted by unfair behaviour. Do we really want to use reason to talk ourselves into accepting it? Why trusting strangers appears essential for economic growth In research carried out in 1997, thousands of individuals in dozens of countries were asked to rate their trust in people they did not know well, ranging from their car mechanic and primary care physician to government officials responsible for public services. One finding pointed to a strong link between the trust people are willing to give to strangers and the GDP of the country in which they live. So countries with high levels of trust in strangers have correspondingly higher GDPs. The implication is that trust is an engine of cooperation between individuals. Cooperation, in turn, is an engine of economic growth and social welfare. Why overconfidence isn’t always a good thing Looking at the behaviours of stock market investors over several years, University of California researchers found that overconfidence was leading to losses. They studied specific decisions around the sales of stock A in order to use proceeds to buy stock B. An investor should rationally undertake such a transaction only if he or she predicts that the performance of stock B will outpace that of stock A. But the data showed that on average each transaction led to a loss of 3 percent. Taking into account transaction fees and other overhead costs, the cumulative losses were even greater. Evidence suggested this was caused by being too active, too confident in their ability to predict increases in the value of stocks. Recently an Israeli newspaper ran an experiment with five investment managers competing against a “monkey” (actually basic computer software that just picked stocks at random). The monkey came second, again because its level of activity was limited while the highly-paid human investors competed to out-perform each other. Eyal Winter is the PWS Andrews and Brunner Chair in Industrial Economics, specialising in game theory and behavioural economics. A Humboldt Prize winner, he recently joined Lancaster University from the Hebrew University of Jerusalem, where he was Director of the Centre for the Study of Rationality. His book, Feeling Smart: Why Our Emotions Are More Rational Than We Think, was published in 2015 by Public Affairs (publicaffairsbooks.com). Since its release, Feeling Smart has attracted endorsements from eight Nobel laureates in economics, and in addition to the English version, has been published in German, French, Chinese, Japanese, Turkish and Hebrew.
RkJQdWJsaXNoZXIy NTI5NzM=