The Hidden Traps in Decision Making

Introduction

• Decision making is crucial and risky for executives.
• Bad decisions often root in poor decision-making process or cognitive biases.
• Psychological studies reveal heuristics as mental shortcuts that can mislead.
• Identifying and compensating for these traps can improve decision quality.

Psychological Traps in Decision Making

Anchoring Trap

• Definition: Initial information disproportionately influences decisions.
• Example: Estimates of Turkey's population influenced by an arbitrary number.
• Business Context: Past data and trends can anchor decisions, affecting forecasts.
• Mitigation Strategies:
  • View problems from different perspectives.
  • Think independently before consulting others.
  • Avoid revealing your own biases when seeking counsel.
  • Use anchors advantageously in negotiations.

Status-Quo Trap

• Definition: Preference for the current state due to comfort and safety.
• Examples:
  • People keeping inherited stocks to avoid change.
  • Businesses maintaining current management structures post-acquisition.
• Psychological Basis: Protecting ego and fear of criticism.
• Mitigation Strategies:
  • Constantly align status quo with objectives.
  • Recognize multiple viable alternatives.
  • Challenge the status quo when it no longer serves the goal.

Sunk-Cost Trap

• Definition: Justifying past decisions with current choices.
• Examples:
  • Not selling failing investments.
  • Continuously funding failing projects.
• Psychological Basis: Unwillingness to admit past mistakes.
• Mitigation Strategies:
  • Seek external, unbiased opinions.
  • Address personal discomfort with admitting mistakes.
  • Avoid a failure-averse culture in organizations.

Confirming-Evidence Trap

• Definition: Seeking information that supports existing beliefs.
• Example: Consulting a peer to validate personal decisions.
• Psychological Basis: Subconscious bias towards desired outcomes.
• Mitigation Strategies:
  • Critically evaluate all evidence.
  • Engage in devil's advocacy.
  • Avoid leading questions when seeking advice.

Framing Trap

• Definition: Influence of the way a problem is presented on decision outcome.
• Examples:
  • Insurance choices influenced by default options.
  • Investment decisions swayed by presentation of gains vs. losses.
• Mitigation Strategies:
  • Reframe problems in multiple ways.
  • Consider neutral framing that combines gains and losses.

Estimating and Forecasting Traps

• Types:
  • Overconfidence: Narrow range predictions missing extremes.
  • Prudence: Excessive caution leads to conservative outcomes.
  • Recallability: Impact of memorable events on probability assessment.
• Mitigation Strategies:
  • Challenge estimates and encourage honest reporting.
  • Use statistical data rather than impressions.

Conclusion

• Decision making is prone to cognitive biases and traps.
• Awareness and structured processes can reduce these influences.
• Integration of disciplines in decision-making can prevent errors.
• Additional resources: Books by Russo & Schoemaker and Bazerman on decision traps.