Very often the reason for bad decision-making is because of errors or miss-steps in the decision making process, as I have briefly noted. However, sometimes it is mind of the decision maker who is at fault in contrast to the decision making process. Hammond et al has revealed that we use unconscious routines to cope with the complexity inherent in most decisions. These routines are known as “heuristics”. Heuristics can benefit in many situations but in contrast can be misperceived. Another trap is the irrational anaomlies in our thinking. Both flaws are engraved into our thinking process and consequentially we fail to recognize them and ignore them. Pyschological traps can undermine the most carefully considered decisions, and may be even more dangerous than the eight most common errors in decision making listed in Smart Choice’s. “The best protection against these traps is awareness”.
Overlying on the first thoughts is otherwise known as the “anchoring trap”. The anchor trap is defined as a simple test conducted to illustrate the common and often pernicious mental phenonmenon. Anchoring proposes the idea that when we consider a decision, our mind offers disproportionate weight to the first information it receives. Anchors are often invisible and disguised. One of the most common types of anchor is a past history or trend. It is very common that we make decisions in business based on past data, and I believe this to be a strong supporting aspect to the anchoring theory.
For example, many gamblers put heavy stock into recurrent past trends between football teams to project the outcome of an upcoming game. While many of these particular statistic can hold value, the numbers our outcomes of previous games subsequently can have no impact at all on an upcoming game. For example, The Denver Broncos might have an 0-8 record in their last 8 games at Qualcom Stadium. Analyst’s might perceive this static as a recurrent trend and assume that the team has a history of struggling in this stadium and base their projections of the outcome primarily on this past data.
The historical statistic becomes the anchor, and analysts project that there are no reasons to why this wont happen again. However, there are other variable factors to consider such as injuries on the opposing team, newly acquired free agents in the offseason, the teams current progress and ect. To reduce the impact of the anchoring trap, one technique to consider is to think about the decision problem on our own before consulting with others to avoid becoming anchored by their ideas. Our final decision should be our own decision, not someone else’s idea.
The second psychological trap introduced in the article is the “Status Quo Trap” The idea of this theory is that we eliminate any other alternatives and stick with our current situation. We become complacent with the “status quo comfort” (initial decision) and avoid taking action that would upset our comfort level. Research evidence shows that most decision makers display a strong bias towards alternatives that perpetuate the current situation (Hammond, p. 121). This trap is closely associated to the concept of protecting earlier choices also known as “The Sunk Cost Trap”
The Sunk Cost Trap is very common and correlates directly to previous investment decisions we may or may not have made. Our past decisions create “sunk costs” that unfortunately we carry over into making new decisions. Sunk Costs are old investments of time or money that are now unrecoverable (Hammond). Similar to the example provided in the article, I too am guilty to falling into the Sunk Cost Trap. I invested numerous amounts of dollars into my previous vehicle. Between fixing the brakes, brake lights, transmission, and basically every component of a vehicle that could be fixed, I did it.
When the power steering went and I had the alternative decision to sell the car and use the funds to buy a new vehicle, I opted to fix the power steering. I became stubborn because I had invested such an adequate amount of time and money into fixing it, I did not want to sell it knowing that was ultimately the better choice. I made a choice that jusitified my past choices to fix the car, but my past choices were in the past for a reason and I did not recognize they were no longer valid. For the future, I will take the advice and insight that is provided in the article and in Smart Choice’s. I now realize the past is the past and it is my job to not make the same mistake because the previous decision I made is irrelevant to the decisions that lay ahead of me in the future in both business and every day life decisions. In the financial sector, unfortunately the “sunk cost bias” occurs quite frequently in many banks and the consequences are dire. A lack of change in strategy and the protection of early flawed decisions is a common error of many bankers.
Another psychological pitfall is the tendency to see only what we want to see. This is referred to as the Confirming-Evidence Trap. In the decision making process, it is always important to consult with a peer and seek an outside perspective. However, when we let someone else’s advice become the final choice without considering alternatives, an error exists in the decision making process. The confirming evidence trap leads us to seek out information that supports our existing or point of view while avoiding information that contradicts it. We make decisions and seek evidence that only supports our decision; we become stubborn, and only want to seek evidence and opinions that support the decision that psychologically we have already made. Two fundamental psychological forces are present in this trap. We create a tendency to subconsciously decide what we want to do before we figure out why we actually want to do it. Our thought process is stubborn one-way street. In addition, we tend to be more engaged by things we like than dislike.
Confidence in our decision-making is a crucial element. If you are unsure of a decision, you shouldn’t make it because your lack of assurance could be because it is the wrong decision. In contrast, being too sure, or over-confident can also lead to bad decisions. To avoid the overconfidence trap, it is important to put the implications into context. This can happen if we underestimate the high end or overestimate the low end of a range of values for a crucial variable (such as potential sales) and we act accordingly, there is an increasing chance we might expose ourselves to far greater greater risk than we realize (Hammond, p 124).
It is so important to think of the potential implications of our decision no matter how confident we might be. Anchoring is a major cause of overconfidence. We tend to anchor our decision based on our initial estimate. To remedy this, considering the extreme low and highs before we make an estimate. Overconfidence is not just over estimating the low-end probabilities of variables. If we underestimate the high end, we could be missing out on greater achievements.