What Causes Bad Decisions

During my recent workshop Human Resource Management System, I was asked what causes bad decisions. My simple answer was humans are often very irrational. If you’ve ever explored behavioral economics or psychology, you’ve likely found a host of examples demonstrating situations when we make objectively and clearly…bad decisions. With the way our brains function, it makes sense. We do what we can to simplify the world around us, as well as the choices we have to make.

Imagine, for example, if you had to think really hard about every step you took while walking…pick up foot one, keep body standing, look at the ground in front of me, decide where to put foot one, put foot one down, pick up foot two….. Going through that process with each step taken would be draining. Plus, how could you focus on our friend talking right next to you. This can be translated to decision making. Each day, you make thousands of choices, from what time to wake up to what to eat to when you should go to the bathroom. Many of these are on what you could call autopilot. It’s a beautiful thing because it means you don’t have to waste your energy on choices you frequently make. Instead, the answers come easily.

The problem with this automatic processing is that there are instances when you jump to conclusions that are wrong. Behavioral economists and psychologists have done a great job uprooting many of these fallacies. With studies and information at our fingertips, you can make better choices. Below are six of the largest decision-making blunders we all make. Avoiding them will dramatically improve your decision making, which can impact your quality of life and success.

  1. Sunk-cost fallacy. Of all the ones on this list, the sunk-cost fallacy is the most common. Many of the decisions we make are final or difficult to change. For example, let’s say you invest $1,000 in Facebook, and the price of the stock goes down to $600 the following day. The fact that you put in $1,000 initially is irrelevant to the situation at hand; you now have $600 worth of Facebook shares. This means that once the decision is made and our cost is incurred, there’s no point thinking back. You already put in the time, money or other form of investment. Considering that in any future decision is illogical, despite how tempting it is. Instead, you have to present yourself with the new options at hand without considering the sunk cost.
  1. Narrow framing. Would you take this bet? You pay me $1,000 if a flipped coin lands on heads and I pay you $1,200 if it lands on tails. Most people would say no. We tend to be risk-averse, unwilling to risk something like $1,000, despite the reward being a bit greater. Now, what if I offered you that bet, but I promised we would flip 100 coins? Each time, the loser pays up. Would you take it then? Almost certainly, right? The chances that you lose money, overall, are extremely slim. This idea can be applied throughout life. When we’re in situations that will repeat themselves over time, we should take a step back and play a game of averages. A great example is insurance policies on goods. The extra $100 to insure your phone seems appealing compared to the cost of fixing or replacing it. You’ll have many insurance decisions in your life, though. The only thing that would make the deal worthwhile is a belief that you’ll break more than one in five phones. Otherwise, you’re better off paying the $500 when it rarely happens.
  1. Emotionally driven decisions. This is an emotional mistake that people make. When we’re angry or upset, we’re much worse decision makers. When you have to make an important decision and happen to be in a bad mood, you should hold off. Instead, wait until you cool down and can think more clearly. It will remove the outside influences and let you think more rationally.
  1. Confirmation bias. This common one hurts our ability to keep an open mind and shift our opinion. When we have a held belief, we typically look for information that confirms our opinion while ignoring data points that tell the opposite story. For example, if I’m really excited about a new software product that I just integrated into my business, with 10 of my employees as users, I might have made up my mind about the quality of the service before we put it to use. I would then be more likely to listen to the three employees who enjoy it, not the seven who don’t. There’s almost always information that will validate our opinions, no matter how wrong they might be. That means we need to always look for conflicting evidence and, from there, make judgments based on more well-rounded information.
  1. Ego depletion. This one makes intuitive sense, but it’s one of the most common ways in which we make bad decisions. The idea of ego depletion is that when we’re drained, physically or mentally, we’re less likely to think critically. Think about the times you’ve been exhausted after a long day of work, a big pitch or a conference. In those moments, you don’t want to have to think hard about anything. Instead, you want your brain to work automatically. What that means is that when you’re tired and faced with challenging choices, you’ll rely more on your instinct or automatic processes as opposed to analysis and thought. That can be extremely problematic in situations that require effort.
  1. Halo effect. The halo effect says that once we like somebody, we’re more likely to look for his or her positive characteristics and avoid the negative ones. This is similar to confirmation bias, but it’s oriented around people. For example, let’s say I hired some time ago someone I will call Bob, who was great during his interviews. Through his first few weeks, Bob does a few things well at work, but he also does many things poorly. The halo effect (brought on by his wonderful interview persona) could cause me to ignore his poor attributes and focus on and emphasize his good traits. This can be detrimental in our ability to make judgments about others. We have to realize our biases toward certain people and do what we can to eliminate them.

These are a handful of the many decision-making errors we’re all prone to. Although it’s challenging to scrutinize your preconceived notions from time to time, doing so is worthwhile. It gets easier over time and will, ultimately, make you a more effective decision maker — both personally and as a business owner.

For more on decision making, sign up for a free mentoring session.

Copyright ©John Trenary 2021

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