Think decision-making is about gut feel? Think again. It’s all in the mind.
Making decisions is the most important job of any executive. It’s also the toughest and the riskiest. Bad decisions can damage a business and a career, sometimes irreparably. So where do bad decisions come from? In many cases, they can be traced back to the way the decisions were made. But sometimes the fault lies not in the process but in the mind of the decision-maker. The way the human brain works can sabotage our decisions.
For executives, the psychological traps can undermine everything from new product development to acquisition and divestiture strategy and succession planning. While no-one can rid his or her mind of these ingrained flaws, anyone can learn to understand the traps and compensate for them. These include:
THE ANCHORING TRAP – When considering a decision, the mind gives disproportionate weight to the first information it receives. Initial impressions, estimates, or data anchor subsequent thoughts and judgements. Anchors can be as simple as a comment from a colleague, a number, or a statistic from the morning’s paper. One of the most common types of anchor is a past event or trend.
Because anchors can establish the terms on which a decision will be made, they are often used as a bargaining tactic by savvy negotiators. Their effect in decision-making has been documented in thousands of experiments. Anchors influence the decisions of managers, accountants and engineers, bankers and lawyers, consultants and stock analysts.
But aware managers can reduce their impact by using the following techniques:
- View a problem from different perspectives.
- Think about the problem before consulting others.
- Seek out information from a variety of people.
- Avoid anchoring those from whom you solicit information or counsel.
- Be wary of anchors in negotiations.
THE STATUS QUO TRAP – Decision makers display a strong bias towards alternatives that perpetuate the status quo. The source of the status quo trap lies in the desire to protect our egos from damage. Breaking from the status quo means taking action, and when we take action we take responsibility, thus opening ourselves to criticism and to regret.
Once you become aware of the status quo trap, you can use the following techniques to lessen its pull:
- Always remind yourself of your objectives and examine how they would be served by the status quo.
- The status quo is not your only alternative. Identify other options and use them as counterbalances.
- Ask yourself whether you would choose the status quo alternative if it weren’t the status quo.
- Avoid exaggerating the effort or cost involved in switching from the status quo.
- Remember that the desirability of the status quo will change over time. Evaluate alternatives in terms of the future as well as the present.
- Don’t default to the status quo just because you’re having a hard time picking the best alternative. Force yourself to choose among the options.
THE SUNK COST TRAP – Another of the deep-seated biases is to make choices that justify past choices, even when those past choices no longer seem valid. Executives should recognise that, in an uncertain world where unforeseeable events are common, good decisions can sometimes lead to bad outcomes. By acknowledging that some good ideas will end in failure, executives will encourage people to cut their losses.
For all decisions with a history you will need to make a conscious effort to set aside any sunk costs:
- Seek out views of people not involved with the earlier decisions and who are unlikely to be committed to them.
- Examine why admitting to an earlier mistake distresses you. Remind yourself that even smart choices can have bad consequences, through no fault of the original decision-maker, and that even the best managers are not immune to errors in judgement.
- Be on the lookout for the influence of sunk cost biases in the decisions your subordinates make.
THE EVIDENCE TRAP – This bias leads us to seek out information that supports our existing instinct while avoiding information that contradicts it.
The two psychological forces at work here are our tendency to subconsciously decide what we want to do before we figure out why we want to do it, and our inclination to be more engaged by things we like than by things we dislike. You need to put your choices to the test:
- Check to see whether you are examining all the evidence with equal rigour.
- Get someone you respect to play devil’s advocate. Better yet, build the counter-arguments yourself. What’s the strongest reason to do something else?
- Be honest with yourself about your motives. Are you gathering information to help you make a smart choice, or are you looking for evidence confirming your view?
- In seeking advice, do not ask leading questions. And if you find that an adviser always seems to support your point of view, find a new adviser.
THE FRAMING TRAP – The way a problem is framed can profoundly influence the choices you make. A poorly framed problem can undermine even the most considered decision. But the adverse effects of framing can be limited by taking precautions:
- Don’t automatically accept the initial frame, whether it was formulated by you or by someone else.
- Try posing problems in a neutral way that combines gains and losses or embraces different reference points.
- Think about the framing of a problem. In the decision-making process, ask yourself how your thinking might change if the framing changed.
- When others recommend decisions, examine their frames. Challenge them with different frames.
THE FORECASTING TRAPS – All of the traps discussed so far can influence the way we make decisions when confronted with uncertainty. But another subset of traps can have a particularly distorting effect in uncertain situations because they can cloud our ability to assess probabilities.
- The overconfidence trap. Even though most of us are not very good at making estimates or forecasts, we actually tend to be overconfident about our accuracy. That can lead to errors in judgement and, in turn, to bad decisions. In making predictions most people set too narrow a range of possibilities. For example if managers underestimate the high end or overestimate the low end of a crucial variable, they may miss attractive opportunities or expose themselves to far greater risk than they realise.
- The prudence trap. When faced with high-stakes decisions, we tend to adjust our estimates or forecasts “ just to be on the safe side”. Policymakers have gone so far as to codify over-cautiousness in formal decision-making procedures. For example using worst case analysis and incorporating the worst case into the decision.
- The recallability trap. Even if we are neither overly confident nor unduly prudent, we can still fall into a trap when making estimates or forecasts. Because we so frequently base our predictions about future events on our memory of past events, we can be overly influenced by dramatic incidents that have left a strong impression on our memory. Anything that distorts your ability to recall events in a balanced way will distort your probability assessments.
Still think that decision-making is about gut feel?
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