The Idea in Brief
Making business decisions is your most crucial job—and your riskiest. New product development, mergers and acquisitions, executive hirings—bad decisions about any of these can ruin your company and your career.
Where do bad decisions come from? Mostly from distortions and biases—a whole series of mental flaws—that sabotage our reasoning. We all fall right into these psychological traps because they’re unconscious—hardwired into the way we all think. Though we can’t get rid of them, we can learn to be alert to them and compensate for them—monitoring our decision making so that our thinking traps don’t cause judgment disasters.
The Idea in Practice
The higher the stakes of your decision, the higher the risk of getting caught in a thinking trap. Worse, these traps can amplify one another—compounding flaws in our reasoning. Here are five of the nine traps:
Anchoring:
Giving disproportionate weight to the first information you receive Example:
A marketer projects future product sales by looking only at past sales figures. In a fast-moving marketplace, poor forecasts result.
Avoiding the Trap:
- Pursue other lines of thought in addition to your first one.
- Seek information from a variety of people and sources after thinking through the problem on your own.
Status quo:
Favoring alternatives that perpetuate the existing situation Example:
A key merger stumbles because the acquiring company avoids imposing a new management structure on the acquired company.
Avoiding the Trap:
- Ask if the status quo really serves your objectives.
- Ask if you’d choose the status quo if it the status quo.
- Downplay the effort or cost of switching from the status quo.
Sunk costs:
Making choices in a way that justifies past, flawed choices Example:
Bankers who originate problem loans keep advancing more funds to the debtors, to protect their earlier decisions. But the loans fail anyway.
Avoiding the Trap:
- Get views of people who involved in the original decisions.
- Remind yourself that even the best managers make mistakes.
- Don’t encourage failure-fearing.
Confirming evidence:
Seeking information that supports your existing point of view Example:
A CEO considering canceling a plant expansion asks an acquaintance, who canceled such an expansion, for advice. She, of course, says to cancel.
Avoiding the Trap:
- Check whether you’re examining all evidence with equal rigor.
- Ask a respected colleague to argue your potential decision.
- Avoid “yes-men.”
Estimating and forecasting:
Being overly influenced by vivid memories when estimating Example:
Lawyers overestimate probability of large awards because the media aggressively publicizes massive awards. Lawyers then offer too large settlements.
Avoiding the Trap:
- Be very disciplined in forecasting.
- Start by considering extremes, and then challenge those extremes.
- Get actual statistics, not just impressions.
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—the alternatives were not clearly defined, the right information was not collected, the costs and benefits were not accurately weighed. But sometimes the fault lies not in the decision-making process but rather in the mind of the decision maker. The way the human brain works can sabotage our decisions.
