Check Your Bias: Decision-Making Tips for Business Leaders

The notion that we aren’t rational decision makers is far from novel.

With awareness of behavioral economics rising, people have become more familiar with the devils at play during the decision making process. But managers still struggle to apply these concepts to business. And, consequently, decision-making processes remain flawed.

HERE'S WHY THIS MATTERS

While good decisions are the basis of competitive advantage and value creation, poor decision making can amount to choices that waste time, resources, and money.

Bad hiring decisions is one example. Zappos CEO Tony Hseish reported that this mistake cost his company over $100 million (see Forbes’ The True Cost of a Bad Hire). A Gallup study found that this issue is rampant, with companies making bad hires 82 percent of the time.

Poor decision making can result in short-sighted investments, missed opportunities, and ill-fated projects. And unless managers are proactively taking steps to improve their own decision making, they are at risk of making mistakes that cost their organization money and put their reputation on the line.

SO, HOW CAN WE IMPROVE THE DECISION-MAKING PROCESS?

To answer this, we consulted J. Peter Scoblic, a doctoral candidate in management at Harvard Business School and instructor of Choice Architecture: Designing a Decision Making Environment for Results.

Here, we outline Scoblic’s insights on three common mistakes decision makers make and tips for avoiding them.

Sunk Cost Bias Icon

SUNK-COST BIAS

Individuals commit the sunk cost fallacy when they continue a behavior or endeavor as a result of previously invested resources (time, money, or effort) (see more on source: sunk cost fallacy).

Sunk cost bias affects how we come up with ideas of value. We remain psychologically attached to whatever we’ve done before.

In purchasing situations, we have a tendency to place a lot of weight on effort and money that we’ve invested.

If, for example, someone has completed two years of a PhD program, she may be prone to think she must continue pursuing it because of the time already spent.

But focusing on what has been spent in the past does not take into consideration what the future will cost. 

To make a more rational decision, the student should ask if the future effort required to complete the program will pay off.

FRAMING EFFECT

Choices can be worded in a way that highlights the positive or negative aspects of the same decision, leading to changes in their relative attractiveness (see more on source: framing effect).

How you ask a question can help guide rational decision making.

In framing, the trick is that things framed as losses come off badly, while things framed as gains come off well. So, a vaccination program that will save 95% of people is good, but a vaccination program that will let 5% of people die is bad—even though they’re the exact same thing.

The framing effect especially comes into play when making significant investments.

When you’re in the role of a decision maker, it’s important to be aware that we’re susceptible to sunk cost, especially if information has been framed in a way that highlights or emphasizes it.

AVAILABILITY HEURISTIC

Availability is a heuristic whereby people make judgments about the likelihood of an event based on how easily an example, instance, or case comes to mind. For example, investors may judge the quality of an investment based on information that was recently in the news, ignoring other relevant facts (more on source: availability heuristic).

As humans, we’re forced to make decisions under uncertainty all the time. To avoid information overload, our brains have developed mental shortcuts, called heuristics, so we don’t have to spend time and energy on every decision we have to make.

The availability heuristic is useful in making quick judgment calls—most of the time.

But, as people judge the probability of something happening based on how easy it is for them to call it to mind, they can radically overestimate the incident’s probability of recurrence.

This can impact forecasting or predictive analytics. If analysts recall a recent market fluctuation or event, they are more likely to think the probability of this event is higher.

To combat this, use the base rate, which is the actual rate at which an event has occurred. This will help shed light on the skewed probability.

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