How People Make Decisions Under Uncertainty

One of the simplest exercises I’ve seen to explore decision making involves two dice and a wad of cash.

The facilitator rolls two 6-sided dice. The player will win £20 x the sum of the two dice. The most they could win would be £720 and the least they could win would be £20.

The money is real and only the highest bidder gets to play for the money.

How much will participants bid to play? How much would you bid for the opportunity to play?

The maths is straightforward. There is an expected value of £245, which would be the ‘risk-neutral’ bid. But I’ve never seen a room full of bids at £245. Some people bid well above the expected value. Most bid well below it.

What's interesting is that everyone has exactly the same information.

They know the rules, the process and the potential prize.

Many understand the probabilities.

This isn't a test of knowledge or skill.

It's a glimpse at judgement.

What’s interesting is why people bid as they do. People aren't calculating different answers. They're making different judgements about uncertainty. Some are comfortable taking risk. Others place a much higher value on certainty.

While this is interesting at a personal level, it’s even more interesting when applied to the workplace.

Replace the dice with a £100 million investment, or a new product launch, or acquiring a competitor. The numbers become bigger, but the judgement has much in common. Some people instinctively see opportunity. Most instinctively see risk. And the bigger the deal, the more likely it is that those involved will be looking to minimise the personal risk to their own reputation. This is, course, perfectly reasonable, but if their organisation wants a risk-neutral approach, then there’s a significant tension.

Perhaps that's one of the reasons simulations are so valuable. They don't just tell us what people know. They help us observe how people think, how they deal with uncertainty and, ultimately, how they exercise judgement under pressure.