9 Mental Models to Sharpen Your Decision Making Skills In 2023

Making decisions is a fundamental part of our daily lives, whether we are choosing what to have for lunch or deciding on a major business strategy. However, it's not always easy to make the best choice. Unintentional biases, the influence of emotions, and the availability of information can all affect our decision making process. What steps can we take to identify and mitigate the biases that may impact our decision making? In this article, we will discuss few mental models that can help mitigate the impact of these challenges and guide you towards making more informed and effective decisions.

The 80/20 Principle

The 80/20 Principle, also known as the Pareto Principle, states that roughly 80% of effects come from 20% of causes. In decision making, this means that a small number of factors are likely to have a disproportionate impact on the outcome. For example, in a business setting, 80% of a company's profits may come from 20% of its clients. When making decisions about where to allocate resources, it may be more effective to focus on the high-impact 20% rather than spreading efforts evenly. Studies have shown that the 80/20 Principle holds true across a wide range of industries and situations.

The Anchoring bias

The anchoring bias results in you relying too heavily on the first piece of information encountered when making a decision. This can lead to suboptimal choices as important considerations may be ignored. If you are shopping for a car and the first dealership you visit quotes a high price, you may anchor to that price and be less likely to negotiate at other dealerships. Research has shown that the anchoring bias can have a significant impact on decision making, with people making decisions that are up to 25% worse when anchored to irrelevant information.

The framing effect

The framing effect refers to the way in which the same information can be presented in different ways, leading to different decisions being made. For example, consider a medical treatment or clinical trial that has a 90% success rate. If the treatment is framed as having a 10% failure rate, it may seem less appealing than if it is framed as having a 90% success rate. The framing effect can have a strong influence on decision making, with people being up to three times more likely to choose one option over another depending on how it is framed.

The Availability heuristic

The availability heuristic results in basing decisions on information that is readily available or easily remembered. This can lead to biases as important but less readily available information is ignored. If you are deciding on a vacation destination and a friend recently visited a place and had a great time, you may be more likely to choose that destination due to the strong memory of your friend's positive experience. The availability heuristic can lead to suboptimal decisions as it may cause people to overestimate the likelihood of events based on their ease of recall.

The sunk cost fallacy

The sunk cost fallacy is the tendency to continue investing time, money, or other resources into something due to the perceived "sunk" costs that have already been invested. This can lead to poor decision making as it ignores the opportunity cost of alternative investments. If you have already spent a significant amount of money on a concert ticket, you may be more likely to attend even if you are not enjoying the show, due to the sunk cost of the ticket. The sunk cost fallacy can lead to the continuation of unprofitable or unsuccessful projects due to a reluctance to "waste" the resources already invested.

The escalation of commitment

The escalation of commitment will bias you to continue investing in a project or decision despite evidence that it is not successful. This can be driven by a desire to "save face" or to avoid the feeling of having wasted resources. A business may continue to invest in a new product line that is not performing well due to the desire to avoid the perception of failure or to recoup the initial investments made. The escalation of commitment can lead to significant losses as more resources are poured into a failing endeavor.

The status quo bias

The status quo bias will force you to stick with the current situation or default option due to a perceived cost or effort in making a change. For example, you may continue to invest in a certain mutual fund due to the perceived hassle of switching to a new investment option, even if a more profitable option is available. Or, you may get stuck with your current job situation if you are not willing to have an honest conversation with your boss about the expected goals, outcomes and next steps. The status quo bias can lead to missed opportunities as people may be unwilling to consider alternatives to their current situation.

The halo effect

The halo effect refers to the bias to allow one positive attribute to influence our overall perception of a person or situation. This can lead to biased decision making as it ignores other important considerations. If a job candidate is attractive and well-dressed, they may be perceived as more competent overall and be more likely to be hired. The halo effect can have a significant impact on decision making, with people being up to three times more likely to choose one option over another based on a single positive attribute.

The representativeness heuristic

The representativeness heuristic will result in you making judgments about the likelihood of an event based on how closely it aligns with our mental prototypes or stereotypes. This can lead to biases as important information may be ignored. If you are trying to determine the probability that someone is a doctor based on the fact that they are wearing a white lab coat, you may be using the representativeness heuristic. The representativeness heuristic can lead to inaccurate judgments as it ignores the role of probability and statistical evidence.

By incorporating these mental models into your decision making process, you can mitigate the impact of biases and make more informed and effective choices. Have a wonderful 2023 with lots of objective decision making!