5 Biases That Lead To
Bad Decisions

growing body of research reveals that our behavior and decisions are influenced by an array of strong psychological undercurrents. Scientists have identified five flaws in how we think when making decisions. They’re hardwired into our thinking process, so we often fail to recognize them.

1.  Loss Aversion
We experience the pain associated with loss much more vividly than we do the joy of experiencing a gain.  For example, if egg prices go down, sales go up. But if egg prices rise proportionately, sales dip by 250 percent. Consumers stop buying them because the price has increased.

This response flies in the face of traditional economic theory, which dictates that people should react to price fluctuations with equal intensity, regardless of whether price rises or falls. In reality, we illogically overreact to perceived losses.

This also explains why people are much more likely to buy meat when it’s labeled 85 percent lean instead of 15 percent fat. Similarly, twice as many patients opt for surgery when told there’s an 80 percent chance of survival, as opposed to a 20 percent chance of dying.

2.  Commitment
We have a tendency to stick with the status quo. When we’ve invested our time and money in a project, it’s difficult to let go—even when things clearly aren’t working.

History shows us how hard it was for Lyndon B. Johnson and George W. Bush to find solutions to the wars in Vietnam and Iraq, respectively. They were strongly influenced by the forces of commitment and aversion to loss.

When CEOs and boards of directors are charged with making critical strategy decisions, determining the best outcomes often proves challenging when strong egos and competitive personalities are added to the mix.

3.  Value Attribution
It takes enormous energy to consciously work through all possibilities and risks when weighing important decisions, so the brain looks for shortcuts. But these shortcuts also present traps because they largely occur without our awareness.

Value attribution serves as a quick mental shortcut to determine what’s worthy of our attention. When we encounter new objects, people or situations, the value we assign to them shapes our future perceptions of them.

If, for example, we see a poorly dressed street performer playing music in a subway station, we assume he’s a struggling amateur with little talent, even when the music is good. These assumptions were proved true when Joshua Bell, one of the finest violinists alive, participated in a field study for the Washington Post.

While Bell, dressed in jeans and a baseball cap, played a $3.5 million Stradivarius, subway travelers rushed by without paying attention. While he certainly sounded far from mediocre, he looked the part—and commuters attributed the value they perceived (appearances) to performance quality.

The Bell experiment illustrates why we may turn down a pitch or idea based on appearances, rumors or any other peripheral value. It also explains why we may blindly follow the advice of someone who has been highly recommended.

Becoming aware of our brain’s tendency to make assumptions can help us prevent disastrous mistakes and missed opportunities.

4.  Diagnosis Bias
When we encounter new people at a party, we quickly diagnose them by placing tags on them, such as “approachable” or “standoffish.” This helps us quickly decide if we want to engage them in conversation.

By employing this mental shortcut, we fail to see a person’s good qualities. Nowhere is this clearer than in job interviews. Managers value their intuition and think they have a refined ability to truly see and understand an applicant. They overestimate their ability to form objective opinions and underestimate their subconscious biases.

Decision Effectiveness
Decisions are the lifeblood of action, and little gets done without them.

A recent Harvard Business Review article recommends a decision audit to identify key organizational needs, using the following short survey:1

How do your organization’s decision abilities stack up against the competition?

• Quality: When looking back on critical decisions, how often have you chosen the right course of action?
• Speed: How do you rate the speed of your critical decisions in comparison to your competitors’?
• Yield: How often do you execute critical decisions as intended?
• Effort: How much effort does your company put into making and executing critical decisions?
  

5.  The Certainty Bias
Leaders forget the mind’s fallacies. They believe in their people and senior team. They are generally confident that colleagues are well intentioned, with the company’s best interests in mind.

After gathering as much information as possible and weighing all of the arguments, leaders must make decisions and embrace an attitude of certainty and confidence. Persuading others to execute the plans is the next step.

Certainty, however, can lead to other errors, such as failure to adjust plans, when required, and shutting out conflicting information. The only way to counteract the certainty bias is to encourage dissonance.

Perhaps Alfred P. Sloan, president of General Motors in its prime, said it best. After adjourning a meeting shortly after it began, he announced:

"Gentlemen, I take it we are all in complete agreement on the decision here… Then I propose we postpone further discussion of this matter until our next meeting to give ourselves time to develop disagreement and perhaps gain some understanding of what the decision is all about."

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1 Blenko, M., Mankins, M., Rogers, P., “The Decision-Driven Organization,” Harvard Business Review, June, 2010.

"If you can't pay me, I don't want it; but if you can, I do."

- Overheard from a customer in line at a bank

Geeks, Geezers and Googlization
By Ira S. Wolfe,  2009

One of the things I really value about a good book is the ability to wrap language around thoughts or observations I have had in my daily work and life. As an executive coach, I work with all 4 generations and see the effect of the impact of them in the workplace. Ira has done a great job of putting language around what we have all seen. Especially poignant for me were: 

-Clearer definitions of the 4 generational groups.
-The "Perfect Labor Storm" and its implications in the workplace.
-The squeeze play happening to gen-x, and the "gray" ceiling that is keeping gen-x from moving into the positions of power that would have traditionally been theirs.
-And most importantly: some things we can do once we understand the language.

Great job, Ira. I, too, feel like a gen-y trapped in a boomer body! I can't wait for your next book!