Psychological reasons we make bad decisions

3 Psychological Reasons We Make Bad Business Decisions

Psychological reasons we make bad decisions

When I interview people or get to know another colleague, I always like to ask them what their worst business decision was. The truth is, I have made some mistakes in my career and find that it’s an incredibly validating experience to know that I wasn’t alone. It can often times be embarrassing to think about (or even discuss) past judgments that didn’t work out for the best. We feel inferior, inexperienced and sometimes just plain stupid. However, understanding where we made mistakes in respect to our own thinking is a great way to learn, grow and make sure to not commit the greatest sin of all -- repeating the same mistake again.

In this post, I am going to summarize the three major psychological (human thinking related) reasons why we all make poor business decisions and explore alternate strategies.

Understanding the strengths/weaknesses of our own brains

Before getting to the list, it’s important to consider that while everyone’s thinking has some predetermined (nature) roadblocks, human beings are exceptional at a few things. For one, the human brain is designed to be extremely good at pattern recognition. This one seems silly, but do you ever wonder how you remember people’s names and faces? It’s because your brain is wired to make strong associations and then reinforce them with different types of cues. Seeing patterns is essential for decision making and we have our ancestors to thank for that. That being said, all of us have to deal with the weaknesses that our brains have as well. We all know that human memory isn’t perfect, but there are other important thinking-related logical missteps that many of us make.

Contradictory information

One of the biggest weaknesses of our thinking is that the brain is not very good at recognizing and accounting for contradictory information. In life, we all know people that tend to flip-flop their opinions and perspectives on a wide variety of issues. This isn’t because people are stupid or incompetent; instead, our ancestors never had a strong need for this mental skill. Studies have shown that this specific skill is rather underdeveloped. However, in today’s day and age, not being able to recognize contradictory information can be a very costly business mistake.

I have to admit that I was guilty of this error many times in my career. When I was building and licensing custom website applications for my second business venture, I was tasked with making a critical decision regarding the choice of a hosting provider. Initially, I took my time and evaluated all of the options on a spreadsheet on the basis of site speed and performance. Because of other pressing matters, this hosting migration didn’t take place until a few months later. When the time came, I decided to ask my circle of technical advisers and went with Rackspace because of their recommendation as well as some brief follow-up research. After spending a grueling ten days migrating and debugging almost all of our client websites I was surprised to hear all of our customers complaining that the sites were slow.

Thinking it was user error, I immediately set up side by side speed tests for both hosting environments. To my surprise, I found that with Rackspace, the sites were almost three times slower (by page load speed) compared to the much cheaper alternative that we were using before. After apologizing to my entire customer base, I sat down and critically assessed why I made the mistake. I dug up the previous spreadsheet I had and read my own notes which commented that “Rackspace is expensive, support is good, but speed is horrible for the technology stack that we are using. Not a good option.”

Essentially, I made a costly business mistake because I took a recommendation and was reminded of Rackspace’s “We serve the Fortune 500” mantra. The fact that this recommendation was contradictory to my own analysis really slipped by me because of the time I took between my assessment and moving forward with the vendor.

The lesson here was simple: always do your own analysis and take the time to identify, investigate and reconcile any conflicting information. Secondary advice and counsel is extremely important, but should always supplement your own thorough research.

Immediate information impacts our decisions more than long-term critical assessment

In the business world, I have always been told that “first impressions are everything.” While first impressions are surely important, they tend to overshadow the facts and details that can only come from true critical analysis of a situation or person. Most people tend to place excessive emphasis on information that is directly in front of them when making decisions. When information is immediate, it commands our attention and makes it difficult to step back and assess the other sides and perspectives.

Consider the immediate frustration that you may have had when a waiter has mixed up your order at a restaurant. It’s easy to let the current facts impact your judgment over that person’s competence or overall willingness to do their job properly. Without thinking clearly or considering an alternative, it would be difficult to consider that perhaps the person is just having a terrible day or has made that mistake for the first time in their life. We can’t know if we are blinded by what we see in front of us.

This mistake is most costly for rookie managers that have to hire people and interview them for the first time. When I was training my first tier of department managers at Ultius, we conducted group interviews where I observed and provided feedback based on the ratings each candidate received. I was really surprised to hear that the newly trained managers wanted to pass up on specific candidates because they made minor errors during the interview. For one candidate, he established a clear track record of past performance but arrived slightly underdressed (less formal than expected). The manager doing the interview was so unimpressed that they made a formal recommendation to pass on him.

However, at Ultius we were really focused on building a strong company culture based on our company values, one of which was autonomy. Upon further inquiry, I found out that the candidate studied our company culture presentation and specifically read that we valued personal freedom when it comes to how you dress for work. Not only did this candidate read through the presentation without being asked, but he took the time to assess and decide what outfit would be the best strategy for getting the job. When I reminded the manager about these facts, they quickly changed their mind and learned an important lesson about immediate information and how that impacts our judgments. Needless to say, the candidate ended up getting the job and is still with the company.

It’s always a best practice to not let immediate information guide your decision making. This rule of thumb applies to business as well as life in general. “Don’t judge a book by its cover” is cliche, but it really is a good practice in most cases.

This-or-that situations

Finally, my experience has shown that people tend to boil down problems or situations with an “either this-or-that” kind of solution. Generally, most competent people make decisions by assessing the alternatives and listing their pros and cons. Many times, we are stuck with two relatively opposing paths and feel obligated to take just one. After we make the decision, we find solace in the fact that we picked the best decision based on our analysis. However, this kind of thinking boxes us in with a decision that could have been much better.

I recently read The Opposable Mind by Roger Martin (see my reading list) and he discussed this same issue in great detail. Martin noted that most exceptional CEOs and business leaders have the capability of being presented with two different options and coming up with an alternative solution that involves taking the best of both worlds and avoiding the negatives. The rationale is this: the two conflicting options you have are just two models of reality that you know about. There are more than likely other models of reality that you just have not explored yet. Within this third realm exist many other options and models of reality that you can leverage for solving problems and avoiding costly mistakes.

It’s most appropriate to showcase this point by Martin’s own example about how the United States dealt with the Soviet Union during the Cold War. It’s not a business example, but it does show how crisis-aversion happened on a global scale.

After WWII ended, the Soviet Union began spreading its ideological views (with tanks) about communism to other nations. Slowly, nations were gobbled up under the pretense that communism was a better form of governance. The United States was stuck in a real bind about how to deal with this matter. Initially, diplomats and experts came up with two very different options:

Appeasement

Let the Soviets spread communism and don’t intervene in the global problems of other nations. The pro was that the United States wouldn’t expend resources or risk nuclear war, but the drawback was that the USSR may get more power hungry and become more aggressive.

Rollback

Rollback was an opposite approach that essentially meant that the United States would intervene by using military and other means to stop the spread of communism. The pro was that the United States could potentially stop communism, but the drawback was that the risk of a nuclear war was high.

What was the United States to do when at the time there only seemed like there were two choices? United States diplomat George Kennan knew that there was another model of reality that wasn’t explored yet. Kennan came up with some higher level assumptions first:

  • Nuclear war should be avoided at all costs
  • Communism will eventually fail on its own
  • The US should be weary of long-term military commitments abroad against a strong opponent

In 1947, Kennan came up with the policy known as Containment. Under Containment, the United States would try to focus on reducing the spread of communism rather than trying to destroy it outright through heavy military intervention. While various presidents dabbled in engagements outside of the policy of containment, for the most part the United States stuck with it until the Berlin Wall came down. Most notably, no nuclear war happened.

The containment example illustrated how when we are faced with two opposing options, we should understand that we are not stuck in a box. We are only seeing two models of reality and should invest the time and resources to find alternatives that don’t have trade-offs (if possible of course).

For the case of Kennan, he found a way for the United States to have its cake AND eat it too.

Why we should reflect critically on our mistakes

Being the smartest animals on the planet, it’s difficult for many to realize that our thinking and logic isn’t always perfect. Like any creatures that learn and grow, we are all going to make mistakes. I believe that working towards understanding our thinking-related challenges helps us avoid costly business mistakes. Whether it’s not relying on first impressions, doing our own analysis or thinking about different alternatives, we are all smart enough to acknowledge that we can do better by being critical about the missteps that we took.

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