AMSTERDAM: Nevertheless Michael Lewis’s The Undoing Project is holding its own against the likes of the late Carrie Fisher’s autobiography, the Princess Diaries, which is currently popular for the saddest of reasons. Lewis’s book chronicles the work of two psychologists, Amos Tversky and Daniel Kahneman.
Both were academic researchers, but perhaps unlike much academic research, their work focused on a topic of interest to most of us why people get so many decisions wrong. Explanations of how decisions are taken where there is a risk of a bad outcome typically centred around the ideal of a rational economic person.
Such a person, in possession of all the facts, would weigh up the risks and likelihoods and come to a reasonable decision. The problem is that the ideal of the rational economic person is just that, an ideal. In the real world, people don’t take decisions that way.
To find out why, Kahneman and Tversky carried out a range of psychological tests and experiments and concluded that when taking decisions, human beings are slaves to how we measure up situations (what they called framing), and to our own biases about the facts.
For instance, we tend to place far more store on our experiences than on objective knowledge of the facts. Objectively, air travel is far safer than road transport, yet many people who suffer from a fear of flying have no difficulty sitting into a car. Because we are not omniscient, nor have unlimited time at our disposal to agonise over every decision, our biases about facts can serve as useful shortcuts when making decisions.
However, those same biases can lead us to take poor decisions, no matter how compelling the objective evidence may be to choose otherwise. Organisations, on the other hand, are much more likely to take objective and rational decisions based on the facts as presented, if only because there are more people involved in the decision-making process.
Organisations will also be more likely to have the services of individuals who have expertise in the area where decisions are to be made and who should therefore be more objective when assessing the facts.
Kahneman called organisations “decision-making factories” for these reasons. This insight may also help explain why bigger business tends to be more tax compliant than smaller taxpayers.
Revenue recently published its headline results for 2016, which sets out preliminary figures for the type of taxes it collects, the type of taxpayer from whom they collect, and what it does to enforce non-payment. Taxpayers are divided into three categories: Large (who pay more than €500,000 annually); Medium (who pay €75,000 to €500,000) and Other.
A tax bill of €500,000 looks and indeed is colossal, but these threshold figures include things like the Paye an organisation will deduct from its employees, and the Vat it charges its customers.