Decision-making is very much what we do every single day and almost every moment. There’re two types of decisions – programmed and non-programmed. A programmed decision is repetitive and routine in nature. It is common in organisations and largely automatized, subject to rules and policies. A non-programmed decision is more unusual and made less frequently. Non-programmed decisions are the ones that are subject to biases.
The brain cannot give the same energy to the same decision. In an attempt to draw shortcuts to save time and energy, it depends on the influence of data it already holds which affects one’s decision-making at work and home.
John S. Hammond, Ralph L. Keeney, and Howard Raiffa of the Harvard Business Review’s 10 MUST READS examined eight psychological traps or biases that can affect the way we make business decisions and some of these can be related to personal decisions. The traps discussed below influence how people make decisions across all disciplines be it engineers, accountants, consultants, lawyers, and even stock analysts. These include;
The anchoring trap – This bias leads one to give disproportionate weight to the very first information they receive. This may include any initial impressions, estimates, or date anchors which subsequently affect thoughts and judgments. Anchors come in different forms and one must be careful to be able to catch them. It could, for example, be a comment by a friend, or morning newspaper, or a billboard one drives passed. In business, one of the most common types of anchors is the past event or trend for example many marketing firms or departments set their marketing objectives based on past sales. So, this becomes an anchor. Although this approach will give more or less accurate estimates, it will put a lot of emphasise on the past instead of on the future. This could lead to misguided choices and outcomes.
Status-quo trap or similarity biases are biases toward maintaining the current situation – even when better alternatives exist. It is known that decision-makers tend to make choices that confirm the status quo. In new product development, for example, a new model will most likely look like the precursor. Decision-makers display a strong bias towards alternatives that perpetuate the status quo. This can happen with personal decisions as well. This bias is known to lie deep within our psyches and we rely on it as a means to protect our egos from damage. If we act away from the status quo, it means we’re taking responsibility and if things don’t work, then we’re opening ourselves to criticism and thereafter regret. It thus becomes safer to make a decision that doesn’t bring about much change.
Sunk-cost trap biases perpetuate the mistakes of the past. In this situation, one makes a decision that justifies past choices even when the past choices are no longer valid. For example, retaining and investing in a product or business portfolio that you should have got rid of. The past decision chains one into a continuous investment of time and money. What is important to note is that sunk costs are irrelevant to the current decision yet they continue to a big part in the minds which leads to the wrong decision. One has to admit to making a mistake and move forward.
The confirming-evidence trap is a bias that leads one to seek out information supporting an existing predilection and to discount any opposing information. It is also known as safety bias. This bias leads one to seek out information that supports our existing point of view while avoiding information that contradicts it. If advice is sought from a friend for example, be assured that even if they are chief executives, they will provide advice that favours their own decisions. The bias surfaces from where we collect evidence and also how we interpret the evidence we receive which makes us give more weight to supporting information and less weight to conflicting information.
The framing trap is a bias that occurs when we misstate a problem, which then undermines the entire decision-making process. Many decisions fall within this trap as the first step in decision-making is to frame the question which makes it one of the most dangerous steps. This is because the way the problem is framed can profoundly influence the choice one makes.
The overconfidence trap is a bias that makes us overestimate the accuracy of our forecasts. This, as we see, can lead to errors in judgment and in turn bad decisions. Studies have also shown that when people state that they are 65-70% sure, they are right, when they are only 50%, and those that state that they are 100 % right are about 70-85% of the time. This has a great implication for business decisions given that many decisions depend on estimates.
The prudence trap, is a bias that leads us to be overcautious when we make estimates about uncertain events. This normally happens when there are high-stake decisions to be made. This may involve adjusting estimates and forecasts just to ensure that one is on the safe side. It is the “just in case” and the “worst-case analysis.” These scenarios may mean extra costs, time delays, or low supply or high supply. Too much prudence can sometimes be dangerous as too little.
The recallability trap prompts us to give undue weight to recent dramatic events. Since we frequently base our predictions about future events on our memory of past events, we can be overly influenced by dramatic events- those that leave a strong impression on our memory. There’s a tendency to exaggerate the probability of rare but catastrophic occurrences such as plane crashes because they got disproportionate attention in the media. A dramatic or traumatic event in your own life can also distort your thinking.
You will start to assign a higher probability to traffic accidents if you have passed one on the way to work. Anything that distorts your ability to recall events in a balanced way will distort your probability assessments which affects the quality of the decisions made.
The best way to avoid all these traps is becoming AWARE of them.
Ways to overcome these biases will be discussed in our next issue.