Life is full of good and bad decisions. Thinking back to our youth, we can all come up with a few examples. As we mature, we learn that bad decisions are usually made because of factors like a lack of knowledge, impulsivity, or not taking the time to think things through. We’re not perfectly rational creatures, but there are some things we can do to make up for that. Understanding the barriers between us and rational decision-making can help us as much in our personal lives as it does in our business lives.
Our previous article reviewed the factors involved in analytical decision-making, different ways to evaluate each department, and resources to learn about making wise choices. This article will review some of the factors that lead us to make bad choices and learn how to avoid them. We’ll also cover a few ways that you can improve your ability to make better decisions. Let’s get started by reviewing what moves people to make bad choices.
Why do we make bad decisions?
We like to think of ourselves as rational creatures who are not affected by emotion or flaws in our logic. The truth is, the more that we believe this about ourselves, the more likely we are to fall victim to our own nature. The human brain likes to run efficiently, like a computer, and we rely on our own habits and patterns to make quick decisions about our lives. However, this means that much of our decision-making goes on underneath our conscious awareness. Some examples of choices that you likely make without thinking are:
- Which route do you take to work
- What time do you eat your meals
- Which apps do you use daily
- How you go about your day-to-day routine
You’ll notice that these are all habitual decisions. Is each choice the best option available? Probably not, but sometimes it’s easier to continue doing something that’s causing no problems than to put extra effort into finding a more efficient solution. We run off shortcuts that save us mental energy because it allows us to save more “processing power” for the bigger decisions in life. However, letting so many choices run under our awareness leaves us vulnerable to the consequences of these decisions.
Sometimes, even though we’re aware of the consequences, the force of habit pushes us to continue to make bad decisions. If we know something is not the right choice, why do we still do it? This isn’t an indicator of a wider moral failing; it has to do with the following patterns that many people use when processing information.
The sunk cost fallacy
Consider this example. You’re three months into a project, and the contractor you hired just isn’t performing. However, it’s too late to find someone else for the job. It’s better just to continue with what you have now and hope that it gets finished. Does this sound familiar? This is an example of the sunk cost fallacy where you justify continuing to make a bad decision by looking at the time, effort, or money you’ve already invested into your choice.
The fact of the matter is that the contractor probably won’t change if you’re already three months in. It doesn’t matter whether or not you stay with the same person. You won’t recuperate the money and time that you’ve already spent. If you look at the future as a clean slate, would you choose the same person again? Logically, it will be best to drop the existing plan and find someone who can work better with your specifications. However, most of the time, people can convince themselves that there’s still a chance they’ll get their desired outcome despite all the evidence against it.
This fallacy has to do with our perception of loss versus gain. Often, people will value an option that they perceive will help them avoid loss over one that will return a larger gain with a slightly higher risk. We think in chronological forms, like reading a story. This thought pattern assumes that the story ends with the “failure” of the plan instead of a lesson learned and applied.
The action bias
Especially in Western cultures, we have a bias towards “doing.” Sometimes, the best thing to do is nothing. Consider a plan that’s working well with no issues. If all of your metrics point to success, why do you still feel the need to act? This boils down to our survival instincts, in which those who acted when faced with a threat survive longer than those who remained passive. As our personal experiences develop, we remember situations in which inaction caused great harm, which motivates us to take action even when necessary.
Taking action makes us feel like we’re in control. When we’re doing something, it makes us believe that we are changing the outcome. In a sense, we are, but that outcome may be divorced from what we have planned for in the past. Those who are more confident often fall victim to this bias more than their hesitant counterparts. If people believe that their action gives them control over an outcome, they’re less likely to wait, even if a plan is going well. While not completely absolved from this bias, their more reserved counterparts tend to be more careful and wash current results before taking action.
Choosing inaction when all is going well is a skill that you can practice over time. Think of rest as an action in itself. Rather than going into a task ready to make a change, analyze your data and see how things are going first. Then, you can decide whether the task should be left as it is or whether an intervention is needed. Over time, this will come more naturally to you and serves as a lesson in patience and observation. As the adage goes, “If it ain’t broke, don’t fix it.”
The anchoring bias
Humans use comparisons to understand the world around them. This manifests in how we use the first information that we’re presented with to judge later information. Think about discounts at a clothing store. If you see the original price crossed out and replaced with a lower price, your first reference will be the higher cost. Then, you’ll see the new information with the discount which will influence your choice. Who doesn’t like to save money? This is one way that the anchoring bias is used to affect your decisions. The overall cost of the item might be higher than what you’d like to spend, but the idea that you’re getting a lower price influenced your choice.
In business, this can skew your judgment in situations where you’re presented with new information that contradicts older data. Your staff may be more likely to go with the first idea that someone voices and contribute less input. This can take the form of a psychological effect called priming, where the first piece of information you receive serves as a reference point for later reasoning. Think back to the game where you have somebody repeat close rhymes to the word fork and then ask which utensil they use to butter toast. If you do the game right, they’ll automatically respond with the word “fork* even though the answer sounds ridiculous in context. This is one clear example of how the anchoring bias leads us to make illogical choices.
The anchoring bias is one of the more difficult biases to overcome. While you can’t entirely avoid it, you can mitigate its effects by taking your time with decisions and thinking about reasons why your choice would be inappropriate for the situation. This way, you can clearly visualize the pros and cons of each decision.
Have you ever stood in the supermarket looking at 10 types of cereal that seem to be more or less the same? It’s hard to make a choice when you have a larger selection of options. Choice overload leads to a slower decision-making process even when time is of the essence. We want to ensure that we’ve got the right solution, but filtering through so much information isn’t natural for us. In business, you may see this for example when choosing software for your team. Unless you have a clear differentiation between your available options, it’s difficult to see your best choice.
We have more choices than ever and few mental resources to make them. This can lead to a draining, stretched-out, and unfulfilling decision-making process. Those who have choice paralysis also tend to be less satisfied with their final decision. Our expectations tend to be higher when we have more choices, so we become harder to please. This bias affects people that strive for perfection more than those who are content with good enough, though there’s merit to both mindsets.
Collecting information can help you overcome this bias. When you go into the situation knowing what you’re looking for, you can easily weed out the options that don’t fit your needs. For example, if you’re picking software, know your budget, the number of users, the features you need, and the use cases before selecting your option. Then, you can easily filter out the noise and choose the best option for your company.
How to improve your decision-making abilities
Despite all the challenges, there are ways that you can get better at making smart business decisions. Don’t expect them to be perfect, but be decisive and do your best. Even making the wrong decision is a learning experience that will point you in the right direction the next time. Some ways that you can make better decisions are:
- Becoming aware of your cognitive biases
- Writing out your ideas
- And learning how to overcome your hesitation
Let’s take a deeper look at each of these points and examine some practical ways to apply them.
Become aware of your biases
Though we reviewed several cognitive biases above, there are many more that affect the way you think. Examine your thought processes when you go through your decision-making process and think about why you make certain choices. This will show you how your experiences affect your decisions in the future and help you learn from past mistakes. Read especially into other biases that many people use without noticing and educate your team on them. Don’t focus on changing things just yet. For now, just become aware of what you’re doing. Once you fully understand that, you can go ahead and make the change.
Write out your ideas
Have you ever noticed that your ideas become more coherent when you put them in words? You may have seen this happen when explaining something to a coworker. The reason behind this is that when you turn your ideas into words, you’re forced to organize the details in a way that others can understand. This makes the finer parts clear and solidifies your plan. When making important decisions, you can filter out extra noise from others’ input by writing out your ideas instead. The extra step adds an opportunity for you to clearly evaluate your ideas before putting them into action.
Overcome your hesitation
Inaction is also an action. Except in cases where your plan is already going well, this is one of the most detrimental choices you can make for your company. Keep moving forward, no matter how that may be. If you’re striving for perfection, keep aiming for it but realize that it’s a goal, not a necessity. Much like how choice paralysis keeps people from making decisions, striving for impossible ideals stunts your efforts before they have a chance to thrive. Aim for the option that has the best balance between risks and benefits. Then, make your choice. No matter what you do, the results provide invaluable information to direct your future choices as a business.
Human beings are not perfectly rational creatures. However, we can strive to understand our limitations and overcome them. This undertaking involves looking critically at our current plans and breaking habits that keep us from reaching higher goals. While this is no easy task, it’s essential to your operations and their success.
The more expertise and educated opinions you can include, the more bad decisions you can avoid. Consider bringing a fractional c-suite professional onto your team to help, such as a fractional CMO or a fractional COO. These individuals can help you understand the implications of your choices, your biases in thinking, and how to plan for better outcomes in your internal and external operations. Read more here to see how a fractional CMO or fractional COO can help your team.
Sometimes, our familiarity makes it difficult to see the flaws in our planning. This is where many companies would want to bring in a fresh pair of eyes. One way companies do this is through a business process review. Take a look at what process management involves and who can help in this blog article.