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An Earnest guide
to life’s biggest decisionschoosing a career path, renting or buying, going to grad school, life’s biggest decisionslife’s biggest decisions in this changing,

and often overwhelming, world.

BUT FIRST, A LETTER FROM OUR CHIEF DATA OFFICER

Gian Gonzaga

Gian Gonzaga

Chief Data Officer at Earnest

“What will I eat for breakfast?” and “What will I do with my life?” seem like vastly different questions, but the ways in which we approach each decision have more in common than you think.

In the past 50 years, we’ve learned a lot about how the decision-making process works—from the information we consider and what we ignore to how we fill in the gaps.

For a long time, scientists thought humans were completely rational when it came to our choices (a concept called homo economicus). However, we know now that the decision-making process is much more complex.

The field called behavioral economics, which melds psychology and economics, has revealed that most of our choices are not, in fact, made through careful deliberation. Instead, our decisions—both big and small—are often guided by our emotions, our surroundings, and a host of subconscious mental “shortcuts.”

While some call these behaviors “irrational,” many of the ways we process decisions make perfect sense. Consider one of the biggest choices you’ll make: a lifelong partner. Being in love motivates behavior that seems irrational at first—hyper-focus on one individual, more money and time spent—but it can lead to many long-term emotional benefits such as social support, shared labour, and perhaps most importantly, the possibility of having and raising children.

Why does knowledge about how we make choices matter? So much of our long-term success depends on the decisions we make (and how we make them) in our 20s and 30s. Should we put money away in our 401(k) or blow it on a weekend trip to Vegas? Do we buy that fixer-upper or continue to rent? Do we stay on our current career path or try our hand at graduate school? The better we understand the emotions, motivations and subconscious behaviors behind these decisions, the better equipped we are to make the right ones.

Welcome to Earnest’s New-Fashioned Guide to Decision Making. Our team talked to experts, dug into the data, and heard from people in their 20s and 30s about how they make decisions, so you can use this knowledge to make smarter, better choices in life on your own terms.

Pick a card from the library of behaviors

Present Bias

We prefer immediate rewards over higher-value, delayed rewards. In a University of Chicago study, researchers found that people who felt less connected to their future preferred entering to win a gift card for $120 in a week’s time rather than one for $240 in a year’s time. Our natural preference for the present helps us get through our daily decisions (if we always waited for a “better option” on every decision, we wouldn’t get anywhere), but it also prevents us, in decisions like investing, from reaping greater rewards in the future. 

Anchoring

We have a tendency to rely heavily on the first piece of information we hear when making decisions. One study asked two groups of participants about Gandhi’s age when he died, and found the answers were swayed depending on the “anchor” number in the question. If asked “Did he die before or after the age of 9?”, participants guessed an average of 50; asked “Did he die before or after the age of 140?”, the average was 67. Anchoring can provide helpful reference points during decision making, but it can subconsciously influence us to make poor decisions.

Optimism Bias

We believe our personal futures will be better than our past or present, which leads us to overestimate the positive outcomes of our efforts or experiences. Research from Rutgers University found that smokers underestimate their relative risk of lung cancer compared to non-smokers, and believe they have a lower risk of developing lung cancer than the average smoker. Optimism bias inspires us to strive for a better future, but it can also lead to poor decisions due to our miscalculated outcomes.

Emotional Cognition

Emotions play a key role in decision making. For example, neuroscientists have found that people with brain damage impacting their ability to generate emotion also have difficulty making decisions—whether it’s scheduling an appointment or choosing a restaurant. While emotions can sometimes lead to rash decisions, they also help us make rational choices by considering our personal values, wants, and needs.

Choice Overload

Choice can be empowering, but our ability to manage choice is also limited. If you’re an expert on a topic or have a clear preference for a product, options are great—but if you’re faced with too many similar options, making a decision becomes pretty tough. For example, one study found that customers were 10 times more likely to purchase a jar of jam if they had six options rather than 24.

Sunk Cost Fallacy

Once we invest time, money, or effort into something, we have a hard time moving on. For example, a study found that customers who paid more for season theater tickets also attended more plays (likely because of their higher sunk cost). While sunk cost can sometimes lead us to make poor choices—like sit through a bad movie, or continue on a career path we dislike—some researchers argue it’s also a helpful evolutionary trait, encouraging us to pursue things that are valuable even if we don’t remember our original motivation.

Loss Aversion

Nobody likes losing, but you might be surprised by just how much we hate it. Psychologists have found that the negative feeling of losing is much stronger than the positive feeling of gaining something. For example, let’s say someone offers to flip a coin where you’ll lose $10 on tails. How much would you want to win on heads before accepting the bet? Based on previous research, you’ll probably want the chance to win at least twice as much on heads ($20) before you’ll accept the bet.

Framing Effect

We react to the same option in different ways depending on how it is presented. In a Science study, researchers gave participants two treatment options in a hypothetical situation where 600 people were sick with a deadly disease: In Treatment A, they would save 200 lives and in Treatment B, 400 people would die. Although both treatments shared the same exact outcome, 72 % of people chose the treatment that was framed as “saving lives.”

Confirmation Bias

We tend to search for and interpret evidence as confirmation of our existing beliefs or theories. A study out of Stanford provided people on both sides of the capital punishment debate with two studies: one supporting and one disconfirming their beliefs—both groups rated the study that confirmed their beliefs as more convincing. While this bias helps us make small decisions more efficiently based on what we already know, it can lead to poor choices in complex decisions because we don’t consider all of the facts uniformly.

Herd Mentality

We tend to adopt the actions of people surrounding us. In a study from Leeds University, researchers asked volunteers to walk around a venue without talking to each other, and provided a select few with instructions on where to walk. They found that it took only 5% of people in the crowd to influence the rest—the other 95% of participants followed without even realizing it. On the one hand, herd mentality creates functioning communities and societies; on the other hand, it can lead us to subconsciously follow the crowd when it’s not in our best interest.

Hedonic Adaption

Hedonic adaptation, also known as the hedonic treadmill, is that observation that major life events (positive or negative) only impact our happiness temporarily. Think back to your last raise at work or new purchase—it didn’t take long for you to return to your normal level or “set point” of happiness, right? This observation has led a lot of psychologists to study the limits of happiness, and if it’s possible to shift our “set points.” According to some studies, while happiness does level back to a “norm,” this norm can change throughout our lives and differs from person to person.

Psychological Fit

Money definitely doesn’t grow on trees, but it might be able to buy you happiness—as long as you spend it the right way. This “right way” isn’t universal, though; it differs from person to person based on your priorities and preferences. In a recent study, researchers found that we tend to spend more money on goods that match our personalities, and that individuals whose purchases better match their personality report higher levels of satisfaction.