Optimal Decision Making Needs Social Exploration

If you know about all the decision making traps we face it is a miracle we ever make good decisions. There is the anchoring trap, the status-quo trap, the sunk-cost trap, the confirming evidence trap, the framing trap, and on the list goes. The issue is that there is this competition in our brain between fast and automatic responses and reflective thinking.

Alex Pentland brings us – weary decision makers – good news in his latest article in the Harvard Business Review. Their research demonstrates anyone can learn to be a good decision maker! The key is to engage in social exploration.

Exploration

Social exploration means spending lots of time with different people hearing different ideas (not necessarily only the best ideas) and this pooling of ideas provides you with “the wisdom of the crowd” take on things. The “take” is better than individual judgement.

The question is how far do you take this social exploration. Is there a pattern of social exploration which produces the best outcome? There is.

Pentland and others developed a very clever research project involving online trading platform, eToro. On this platform traders can develop individual decisions (single trade), but they can also copy other people’s moves (social trade). When people copy your move you will receive a small amount of money. Mining 10 million transactions social learning could be tracked and measured in terms of profitability.

  • Isolation chamber traders: traders who were only involved in single trade and who’s trades were not copied earned lower returns;
  • Echo chamber traders: traders who were copying another all the time earned similar returns to isolated traders;
  • Sweet spot traders: traders who balanced others’ ideas with their own achieved 30% higher returns.

Understanding this sweet spot dynamic between copying ideas and own ideas provides us with a rationale to fine-tune social networks to produce better decisions and better results.

Are you in relative isolation with few people and sparse ideas coming your way? Increasing the flow of people and ideas will dramatically improve performance;

Are you in an echo chamber with many interconnected voices and too many ideas so that you can’t think anymore. Reduce the flow and increase processing on your own will dramatically improve performance.

 

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