Decision-making quality decreasing as the stakes rise

After my first lecture, Binmore offered a version of the “low stakes” critique. He said that if he were running a supermarket, he would want to consult my research because, for inexpensive purchases, the things I studied might possibly matter. But if he were running an automobile dealership, my research would be of little relevance. At high stakes people would get stuff right.

The next day I presented what I now call the “Binmore continuum” in his honor. I wrote a list of products on the blackboard that varied from left to right based on frequency of purchase. On the left I started with cafeteria lunch (daily), then milk and bread (twice a week), and so forth up to sweaters, cars, and homes, career choices, and spouses (no more than two or three per lifetime for most of us). Notice the trend. We do small stuff often enough to learn to get it right, but when it comes to choosing a home, a mortgage, or a job, we don’t get much practise or opportunities to learn. And when it comes to saving for retirement, barring reincarnations we do that exactly once. So Binmore had it backward. Because learning takes practice, we are more likely to get things right at small stakes than at large stakes. This means critics have to decide which argument they want to apply. If learning is crucial, then as the stakes go up, decision-making quality is likely to go down.

The rarest decisions carry the greatest stakes and the least practice. Marvellous arrangement.

We become competent at choosing lunch because we repeat it, receive feedback quickly and survive mistakes. Mortgages, senior hires, pensions and homes offer almost none of that. A first-time buyer can research for six months and still have fewer useful repetitions than a café regular gets by Wednesday. Greater seriousness cannot manufacture experience. Nor does adding eighty pages of information help when the buyer lacks a mental model for judging it. This is why plain comparisons, sensible defaults, independent advice, simulations and pre-mortems matter most when the decision looks too important for “nudges”. The sneer gets the logic backwards: high stakes increase the need for guardrails because natural learning is scarce.

Confidence deserves suspicion whenever consequence rises faster than repetition. How many genuinely comparable decisions has this person made? How quickly did outcomes become visible? Which feedback was distorted by luck? A board appointing a chief executive should not mistake seniority for a large sample; the candidates and directors may each have made only a handful of such choices. Build artificial practice where possible. Decompose irreversible commitments. Invite people with different failure histories. The big decision does not reveal our best judgement by magic. Often it catches judgement on the day it has had the fewest rehearsals.