T C A Srinivasa-Raghavan: O dear, must I decide right now?

OKONOMOS

The best decisions are taken by instinct, and not by frequency distributions

How do the heads of large organisations like a political party or a corporation or a central bank or even a government, decide? The received wisdom is that they collect, through briefing papers or by talking to people or in some other way, as much information as possible. Then they ponder over it all. And then they decide.

Nothing, it seems, could be further from the truth. The chaps at the top wing it as much as your small investor housewife or the occasional punter at the races.

And, wonder of wonders, oftentimes, even when they are acting on a hunch that is itself based on a single piece of information, they get it right. The sixth sense plays an important part in successful decisions.

By coincidence, two recent papers show how. One of them is by professional psychologists and was written about in The Economist.

The other* is by economists. They are Patrick Bolton of the Columbia Business School and Antoine Faure-Grimaud of the London School of Economics.

The account in The Economist is about how the human brain, perhaps, makes Bayesian decisions, that is, decisions that are based not on masses of data but just peoples' assumptions about how they think things actually happen. Data is almost wholly irrelevant.

The NBER paper is by economists and devoted to proving, mathematically rather than through experiments as the other paper does, broadly the same proposition. "...we capture a basic aspect of most peoples' behaviour when they face complex inter-temporal decision problems: they think ahead only about the most important aspects of the problem and leave the determination of less important aspects to a later time."

Sonia Gandhi, for instance, while deciding on a Cabinet reshuffle, may talk to a lot of people "" those who say she doesn't are the ones who are not consulted "" but she probably eventually decides on just a hunch and a tit-bit of information.

In other words, when faced with a mass of data or views, the top people pick one or two they think are most important, and decide.

Bolton and Faure-Grimaud also show that decision-makers tend more to worry about what they may have to decide in the future and, thus, prevaricate in the present. While this may (or may not) help them in the future, "the cost is that she delays her current decision while she thinks through the most important future implications."

The most instructive thing that I found in this paper was whether intensive deliberation, data and information allow a decision-maker to change his or her mind. This is important because if a negative view of an option delays the decision, the opportunity cost is zero.

But what when the person prevaricates even when the view is positive? "A boundedly rational decision-maker will postpone taking an irreversible action until she is sufficiently confident that this action yields the highest payoff." So it is not just a positive payoff but the maximum payoff that becomes important.

"However," say the authors, "from our perspective it is not so much that she will delay taking action but that she will eventually decide to act even if she has not fully resolved her entire future action-plan." That is, the bosses do later what they could have done much earlier.

We are seeing something like this happening in the case of economic reforms in India. Everything is getting done but far too slowly and randomly. The airport modernisation decision is yet another instance of this. So is economic reform in West Bengal.

Why does this delay occur even when there are no payoffs? The answer is that the bosses like to postpone the inevitable because the inevitable makes them feel vulnerable.

"By reducing this time-lag the boundedly rational decision-maker is able to reduce the overall expected lag between the time she makes a costly investment decision and the time when she recoups the returns" because this increases the payoff.

In the end, though, it is probably right to say that the line dividing the decisive from the indecisive is an innate Bayesian ability, to be able to instinctively arrive at the right course of action.

True, instinct can sometimes mislead. But the really important thing is to see how often it leads to the right decision.

*Thinking Ahead: The Decision Problem, NBER Working Paper No. 11867 December 2005