Preferences: Why & How To Keep Preferences Stable

If it takes a long time to get to the desired outcome after a decision is made, it is valuable to have a decision maker whose preferences are stable. This is one of many cases where stable preferences are desirable. This text focuses on the following questions:

• In which decision problems is it valuable for the decision maker to have stable preferences?
• Which factors can destabilize preferences?
• How can preferences be stabilized through decision governance?

This text is part of the series on decision governance. Decision Governance is concerned with how to improve the quality of decisions by changing the context, process, data, and tools (including AI) used to make decisions. Understanding decision governance empowers decision makers and decision stakeholders to improve how they make decisions with others. Start with “What is Decision Governance?” and find all texts on decision governance here.

What Are Preferences?

Preferences represent relative desirability of options in a decision situation. If an individual prefers A to B, it means that they would choose A over B if given the possibility. In common models of decision making in economics, preferences are typically assumed to satisfy certain properties:

• Completeness: Any two alternatives can be compared (i.e., either A is preferred to B, B is preferred to A, or the individual is indifferent between them).
• Transitivity: If A is preferred to B and B is preferred to C, then A is preferred to C.
• Reflexivity: Any option is at least as good as itself.

In economic theory, preferences are also assumed to be stable. Empirical research in behavioral economics and decision science has consistently demonstrated that preferences are often unstable—sensitive to context, framing, emotions, and time.

While this instability may reflect adaptability and responsiveness in some situations, there are conditions under which stable preferences are essential. These include decisions involving long-term commitments, strategic alignment, intertemporal trade-offs, or coordination across multiple stakeholders. In such contexts, stable preferences enhance consistency, facilitate accountability, and support coherent execution over time. Conversely, fluctuating preferences can undermine credibility, disrupt implementation, and generate political friction.

When Are Stable Preferences Valuable?

Several properties of a decision problem tend to favour decision makers whose preferences are stable, as such stability increases the likelihood of coherent, consistent, and effective choices. The following properties make stable preferences especially valuable.

• Long Time Horizon: Decisions involving long-term outcomes—such as infrastructure investments, product development pipelines, or regulatory commitments—favour stable preferences. Temporal consistency enables decision makers to evaluate trade-offs reliably across time, maintain strategic direction, and resist myopic reversals due to short-term pressures. Example: A firm investing in decarbonization technologies must maintain consistent valuation criteria over multiple years to avoid abandoning projects prematurely.
• High Irreversibility: When decisions are difficult or costly to reverse, such as mergers, facility closures, or regulatory policy changes, preference stability is critical. In these contexts, shifting preferences after implementation can lead to regret, political backlash, or stranded assets. Example: A government setting long-term emissions targets benefits from preference stability to avoid policy flip-flops that undermine credibility and compliance.
• Multi-Stage or Sequential Decision Structures: Many decisions unfold over multiple stages, where early actions constrain or enable later choices (path dependency). In such problems, consistent preferences ensure alignment across stages and facilitate coherent sequencing. Example: A pharmaceutical company developing a drug must consistently prioritize safety and market potential through research, trials, and launch phases.
• Interdependence Across Alternatives: In problems where options are not independent but affect each other—such as resource allocation across business units or portfolio design—stable preferences help maintain internal consistency. Without them, trade-offs may be evaluated inconsistently, resulting in incoherent outcomes. Example: A central bank allocating liquidity across sectors must hold consistent preferences to avoid unintended distortions in credit markets.
• Stakeholder Coordination Requirements: Decisions requiring coordination among multiple internal or external stakeholders—such as supply chain integration, international negotiations, or joint ventures—benefit from stable preferences, as they enable others to predict, adapt to, and align with the decision maker’s actions. Example: In multilateral climate talks, countries with stable positions are more effective at negotiating and building coalitions.
• Reputational or Credibility Sensitivity: Where credibility and reputation matter—such as in financial markets, diplomacy, or public communications—decision makers with fluctuating preferences risk being seen as unreliable or opportunistic. Example: A central bank that shifts inflation targets frequently loses its ability to anchor expectations.
• Complex Evaluation Criteria: When decisions involve multiple, possibly conflicting, criteria—such as financial return, environmental impact, and equity—preference stability helps ensure that trade-offs are evaluated consistently over time and across options. Example: A social investment fund applying ESG criteria must weight values consistently to avoid mission drift and stakeholder confusion.
• High Decision Frequency with Learning Potential: In repeated decision contexts, stable preferences enable the organization to learn from outcomes and refine processes. Instability disrupts feedback loops, making learning ineffective or misleading. Example: A procurement department that frequently changes its vendor evaluation criteria undermines its ability to develop supplier performance benchmarks.

The following table summarizes the above.

Property of Decision Problem	Why Stable Preferences Matter
Long Time Horizon	Enables intertemporal consistency
High Irreversibility	Avoids costly reversals or regret
Multi-Stage Structure	Maintains coherence across stages
Interdependent Alternatives	Ensures internal consistency
Stakeholder Coordination	Supports predictability and alignment
Reputational Sensitivity	Enhances credibility and trust
Complex Evaluation Criteria	Enables consistent trade-offs
High Decision Frequency	Facilitates organizational learning

What Can Destabilize Preferences?

Preferences are said to be stable when an individual’s rankings of decision alternatives remain consistent across time and contexts. Instability arises when these rankings shift in response to changes in the environment, the decision frame, or the decision maker’s internal state. Empirical research has identified several destabilizing factors, five of which are particularly relevant for decision makers in organizational settings.

Framing Effects and Choice Architecture

Tversky and Kahneman (1981) demonstrated that preferences can reverse when the same options are presented in different ways. For example, people are more likely to choose a medical treatment when it is framed in terms of survival rates rather than mortality rates. In organizational contexts, how a decision is presented—through spreadsheets, slide decks, or verbal briefings—can significantly influence preferences, even when the underlying information remains unchanged.

Emotional and Psychological States

Loewenstein (1996) showed that visceral factors such as stress, fear, or excitement can override cognitive deliberation and shift preferences. For senior executives, emotional reactions to internal pressures or external shocks—such as market volatility or board expectations—can lead to inconsistent strategic decisions.

Time Inconsistency and Hyperbolic Discounting

Laibson (1997) and Frederick et al. (2002) identified a tendency for individuals to prioritize short-term gains over long-term value, even when doing so contradicts their earlier plans. This temporal instability in preferences can be especially damaging in investment decisions, where a firm may forgo projects with high long-term payoffs in favor of short-term earnings management.

Information Complexity and Cognitive Load

Simon’s (1955) concept of bounded rationality implies that when faced with excessive information or decision complexity, individuals rely on heuristics rather than deliberate evaluation. This can lead to inconsistencies in how options are evaluated, especially when decisions span multiple dimensions—such as financial, strategic, and reputational criteria.

Social Influence and Peer Effects

Preferences are also shaped by social norms, organizational culture, and group dynamics (Bowles, 1998). In committees or boards, individuals may shift their positions in response to dominant voices or emerging group consensus, even when their private evaluations differ.

An Example: A Decision Situation Where Stable Preferences Are Valuable

Consider the case of a firm’s annual capital allocation decision. Each year, senior management decides how to allocate limited capital among competing business units, projects, and strategic initiatives. These decisions are multi-period in nature and require balancing risk, return, innovation, and strategic coherence.

In such a situation, stable preferences are valuable for several reasons. First, they ensure internal consistency in how projects are evaluated over time, which improves strategic alignment. Second, they increase the credibility of capital allocation decisions, reinforcing the firm’s long-term commitments. Finally, they reduce political maneuvering, as stakeholders come to understand and anticipate the criteria driving investment decisions.

If preferences shift due to framing, emotion, or group pressure, the result may be an incoherent portfolio, misaligned incentives, and a reduced capacity to execute strategy.

How Can Preferences Be Stabilized Through Decision Governance?

Decision governance refers to the principles, practices, and institutional mechanisms that shape how decisions are made, evaluated, and refined. It is particularly concerned with improving the quality of decisions by managing the information, processes, and roles involved in decision-making. When the goal is to stabilize preferences, decision governance can serve several important functions.

1. Standardize Framing and Information Presentation

To mitigate framing effects, decision governance should establish a standardized structure for presenting alternatives. In the capital allocation example, this might involve a common investment case template with predefined sections: strategic fit, financial return, risk profile, and resource requirements.

Such templates reduce the variability introduced by different presenters and ensure that alternatives are evaluated on comparable terms. Governance mechanisms should enforce this standard by requiring formal review and revision of submissions that deviate from the prescribed format.

2. Create Decision Protocols That Separate Emotion from Evaluation

To reduce emotional bias, decision governance can introduce protocols that create temporal or structural separation between information presentation and decision-making. For example, proposals can be submitted in advance and discussed in multiple stages—initial evaluation, challenge session, and final decision—over several weeks.

This staged approach reduces the influence of visceral reactions and allows for more deliberative preference formation. Governance bodies can also provide decision makers with pre-commitment tools, such as scorecards or decision matrices, that structure judgment and reduce the impact of temporary psychological states.

3. Implement Commitment Devices to Counteract Time Inconsistency

To address hyperbolic discounting, organizations can use commitment mechanisms that bind decision makers to long-term criteria. In the capital allocation case, this might involve setting multi-year investment guidelines and requiring decision makers to justify any deviations.

Additionally, governance frameworks can mandate the use of Net Present Value (NPV) or Internal Rate of Return (IRR) calculations over fixed time horizons, with post-investment reviews to hold decision makers accountable for the full life-cycle outcomes of their decisions.

4. Reduce Cognitive Load Through Structured Comparison and Ranking

Given the limits of cognitive processing, decision governance should simplify the evaluation process by reducing dimensionality and structuring trade-offs. For capital allocation, this can be achieved by introducing a two-step ranking process: first, each project is evaluated against minimum thresholds (e.g., ROI > 10%, strategic fit = high), and second, the remaining projects are ranked using a weighted scorecard.

The use of facilitated workshops or decision support systems can help guide group deliberation and reduce reliance on heuristics. Importantly, the governance framework should ensure that the criteria and weights used in the scorecard are themselves subject to periodic review and stakeholder input.

5. Mitigate Peer Effects Through Confidential Input and Independent Judgment

To reduce social pressure and groupthink, governance practices can require individual decision makers to submit their evaluations independently before group deliberation. This practice, often referred to as the “Delphi method” or “nominal group technique,” ensures that preferences are formed privately and are less subject to social conformity.

In the capital allocation example, each executive committee member could provide a confidential ranking of investment proposals before entering the joint discussion. These rankings are then aggregated and shared as a starting point for deliberation, anchoring the process in individually-formed preferences.

Example Continued

To illustrate how these governance measures might be implemented in a real organization, consider a multinational firm with five business units and an annual investment budget.

Historically, the capital allocation process has been influenced by political lobbying, ad hoc presentations, and inconsistent decision criteria. As a result, the firm has suffered from underinvestment in its core units and a fragmented strategic portfolio.

To improve the quality and consistency of investment decisions, the CFO initiates a new decision governance framework with the following elements:

1. Standardization: All business units must use a common investment proposal template, including mandatory metrics and qualitative assessments.
2. Staging: The capital allocation process is divided into three phases: submission, evaluation, and approval. Each phase is scheduled over a two-month window to allow for deliberation.
3. Commitment: The Investment Committee agrees to use a 5-year IRR benchmark, and deviations must be justified in writing and approved by the board.
4. Scoring: A weighted scorecard is developed in consultation with business unit leaders, and proposals are ranked using this structure.
5. Confidential Review: Committee members submit individual rankings before group meetings. Results are shared anonymously to foster open discussion and reduce conformity pressure.

Within two cycles, the firm observes a marked improvement in decision quality: investment rationales become clearer, politically motivated proposals are filtered earlier, and long-term projects receive more consistent support. Most importantly, decision makers report higher confidence in the process and outcomes, noting that their preferences are more consistent and aligned with strategic objectives.

References and Further Reading

• Bowles, S. (1998). Endogenous preferences: The cultural consequences of markets and other economic institutions. Journal of Economic Literature, 36(1), 75–111.
• Frederick, S., Loewenstein, G., & O’Donoghue, T. (2002). Time discounting and time preference: A critical review. Journal of Economic Literature, 40(2), 351–401.
• Laibson, D. (1997). Golden eggs and hyperbolic discounting. Quarterly Journal of Economics, 112(2), 443–478.
• Loewenstein, G. (1996). Out of control: Visceral influences on behavior. Organizational Behavior and Human Decision Processes, 65(3), 272–292.
• Simon, H. A. (1955). A behavioral model of rational choice. Quarterly Journal of Economics, 69(1), 99–118.
• Tversky, A., & Kahneman, D. (1981). The framing of decisions and the psychology of choice. Science, 211(4481), 453–458.

Definitions

• Decision Governance: The set of institutionalized practices and principles that guide how decisions are made, including how alternatives are framed, evaluated, and monitored for outcomes.
• Framing Effect: A cognitive bias where the presentation of options affects decision outcomes, even when the underlying information is the same.
• Hyperbolic Discounting: A behavioral tendency to prioritize immediate rewards over delayed ones in ways that contradict earlier preferences.
• Commitment Mechanism: Tools or rules designed to enforce consistency over time by binding future choices to present decisions.
• Scorecard: A structured tool for evaluating and comparing decision alternatives based on predefined criteria and weights.