The two decision making paradigms I like to highlight are known as: intuitive and rational.
Intuitive decisions are those we arrive at without conscious thought. Our brains assess circumstances and reflexively or impulsively recommend courses of action. Such decisions are believed to be handled by the more ancient and impulsive portions of our brains.
Rational decisions are the result of deliberate, conscious, thoughtful introspection. Rational thought appears to take place in the newer portions of our brain: the frontal lobe, sometimes also referred to as the “executive brain.” The poster child for rational decision-making is Star Trek’s Mr. Spock.
According to the field of evolutionary psychology, we humans evolved simple intuitive decision making to help us react quickly to dangers and uncertainty. One example is the very basic instinctive choice we make between fleeing and fighting.
Stating the obvious, our surroundings in the last 5,000 years, and especially in the last 200 years, are very different from those we encountered over millions of years of evolution. Thus, our evolved intuition may not apply well to current circumstances.
More than ever, we need our rational brain to override impulsive inclinations. Failure to do so is manifested in a tendency to prefer overly simplistic explanations, blanket statements, and generalizations. Our fast-paced lives and attention-deficit-disordered media reinforce jumping to conclusions and “keeping it simple stupid.” Instead, we must recognize that the answers to most finance questions should begin with a more thoughtful and nuanced, “It depends, ...”
The remainder of this chapter documents some of our psychological and biological predisposition to impulsivity and poor decision making. Recognizing these susceptibilities helps us elevate thoughts from the subconscious into the conscious, thereby allowing us to replace reflexive decisions with more thoughtful ones.