The true blame for the worst decisions in business is on the decision maker. External factors play a secondary role. But what is the source of mistakes? Psychologists argue that a decision maker’s mind gets into so-called traps that influence the decision making process. There are 8 common mental lapses that affect the way people think and prevent them from making correct choices.
What should we do to avoid the decision making traps? Forewarned is forearmed as the proverb says.
The Anchoring Trap
This forces us to rely heavily of the initial piece of information we receive, and use it as a point of reference with much weight. The anchoring trap is a popular tool used in business since prehistoric time. Bargaining is based on it. The seller gives you an initial price and then you negotiate. The price lowers eventually and the buyer pays happily thinking that he’s got a deal. However, that’s not entirely true: the seller made you think that something you buy costs that money, and made that your initial point of reference. In most cases the price you pay is still higher than the true worth, but that’s still how business is done, isn’t it? For example, you paid $80,000 less for your home than the initial price offering. Were you a great negotiator or is this an example of the anchoring trap?
The solution for executives is to stay informed and to study each particular situation in detail. Make sure the decisions are objective and are not based on first impressions or earlier estimates. Beware of the anchoring effect when consulting or negotiating.
The status quo trap
This trap dominates all other alternatives in order to maintain the existing state of affairs, hence better options may be overlooked. Attachment to the present situation or goods affects people’s decisions. Examples show that individuals are inclined to choose the default option or stick to established brands. For example, two US states New Jersey and Pennsylvania offered two choices related to insurance law. One option is more expensive with full rights to sue. The other option is less expensive but limited rights to sue:
- In New Jersey, the default option was the cheaper version. Most citizens selected this.
- In Pennsylvania, the default option was the more expensive version. Most citizens selected this.
An example of brand allegiance: In blind testing, preference for strong brands like Coca Cola or Budweiser is much lower than when people chose brand they recognize.
This trap is very hard to avoid because of primarily conservative nature of man. Our worldview and system of values are subject to pragmatism and tradition. We chose what we trust because we are used to it. Keep in mind though, status quo inevitably changes overtime. Be open-minded, maybe there is a better alternative.
The sunk-cost trap
A trap that makes us lean towards the previous decisions and sustain earlier mistakes. This is one of the most common mind traps and difficult to avoid. Sunk costs, be it finances, emotions, time, knowledge or stress etc., are investments you can’t recover.
For example: A software development company decides to outsource a new mobile app they need. They find someone to do it, discuss the details and prepay several stages of work. However, soon they realize that the product is not what they are looking for. What should the company do? Continue the development despite clear misunderstanding of the main features of the product that unfortunately can’t be changed, or cancel the development and lose their money, time and project. The second option, no matter how painful it is, is a better solution.
To avoid sunk-cost trap executives should make sure the decisions are free from the bias of a wasted investment. Regrets aside. That is how rational decisions are made.
The confirming evidence trap
This trap induces us to seek evidence supporting the existing inclination, disregarding contrasting arguments. Psychologists call it the waiter’s dilemma – waiters want to get higher tip and rely on their judgement about the people they serve. Some look like big tippers – others don’t, eventually confirmation bias prevents waiters from testing their judgement and they give excellent service to people they think will be generous and poor service to the others. If they did otherwise, would their decision be proved wrong?
It is becoming a commonplace decision making problem for executives who want to keep their reputation and authority and never try the opposing ideas. The solution here is to avoid confirmation bias for the sake of objectivity. Sometimes it’s better to question your own judgement and admit mistakes.
The framing trap
A trap that happens when we falsify the problem impairing the whole decision-making process. Frames may be subjective and thus distort the context for the situation. An example of this is common for marketing –how to present bad news in a good way: instead of saying “we no longer carry “ABC brand” we say “XYZ brand” is now available”.
Remember when IKEA changed its kitchen range? It was presented as a great change, but after some time they stopped selling pieces and components for the old range, so many of us (the author of the article included) can no longer replace damaged parts like kitchen doors. The only solution is to buy a new kitchen. It is certainly frustrating for customers but beneficial for IKEA. The best decision is to change your frame for a positive one and start saving for a new kitchen.
It is all about how you view a situation or a problem. A solution is often at hand, just make sure you change the framing and the right decision will be obvious.
The overconfidence trap
This trap makes us overestimate the accuracy of our forecasts. This sets a narrow range of possibilities. For example, an executive is counting on a deal to close if a partner accepted a dinner invitation. Confidence is generally beneficial in business, however it is important to leave room for plan B, in case things don’t go as planned.
The prudence trap
A trap that leads to an excessively cautious approach to making evaluations of uncertain or high-risk events. This usually occurs when executives are faced with high stakes – they practice “just to be on the safe side approach”. This has a lot to do with high-risk management. The key is to balance risks and potential returns. Too much prudence is as bad as too little.
The recallability trap
This final trap causes us to give disproportionate significance to recent, dramatic incidents that are imprinted on our memory. Generally, recallability takes us back to negative or catastrophic occurrences that took place and decisions are made keeping them in mind. This may lead to some good decisions being neglected, just because they are associated with such events. The 2007-2009 financial crisis was disastrous for investors with huge losses on investments. However , according to Ann Dowd, a Fidelity vice president, looking back a decade later, investors who were able to stay the course saw much better results. What looks like a huge loss on a short-term stock chart can look like a blip over a full business cycle. A solution here is to try and keep a long-term view.
To sum up, mental traps lead to wrong choices and poor decision making, thus obstructing progress and success in all aspects of life, business in particular. Things are not always what they seem, thus informed decisions win.
Featured Image: Decisions by 3dman_eu on Pixabay.com