Two Common Decision Making Traps and How to Avoid Them
Stripped down to its essentials, business is about one thing: making decisions. Therefore, decision making is an important skill of leaders in all levels of an organization. It’s also one of the toughest and riskiest skills. It is a skill that can be sidetracked by a number of psychological traps that can undermine decisions. These traps can even cause great leaders to make bad decisions at times. Sometimes the cause is bad luck or poor timing, but more often than not bad decisions are the result of biases that as humans we bring into our decision making processes.
The two most common traps that impact decision making are known as confirmation bias and overconfidence bias. Before I explain them, consider the following business decision. In the spring of 2000, the founder of a start-up mail-order video-rental company flew to Dallas to meet with executives of video-rental giant Blockbuster and propose a partnership. His offer was to sell his video-rental company to Blockbuster for $50 million and together they would create a new video-rental brand. It is reported that Blockbuster executives “laughed him out of the room.”
The start-up company Blockbuster turned down was Netflix. In 2010, Blockbuster would file for bankruptcy and today Netflix is worth approximately $33 billion. At the time, Blockbuster’s business model had two major flaws – high expenses from running thousands of retail locations and its major source of revenue was coming from charging late fees to its customers. Netflix on the other hand was introducing subscriptions for renting videos and allowing customers to keep them for as long as they wanted or return it and get a new one.
So, which of the two common biases were in play in the above Blockbuster/Netflix example? Actually, both were. Let’s start with confirmation bias. Confirmation bias is defined as developing a quick belief about a situation and then seeking information that confirms that belief. This bias impacts not only how we gather information about a situation, but also how we recall information and interpret it. Gathering and analyzing information are important steps in any effective decision making process. Clearly, at the time, Blockbuster’s success prevented their executives from identifying the flaws in their business model. In Netflix, they saw an upstart company with a business model different than their up-to-that-time successful model.
Blockbuster executives also exhibited overconfidence in their decision to ignore Netflix’s offer. Overconfidence bias is defined as thinking we know more than we do about how the future will unfold or about our knowledge on a subject. It can lead to significant miscalculations of risk. Admittedly when you’re making a lot of money with your current business model why should you consider changing it? Or, for that matter, take advice from a start-up company with no retail stores and just a few employees. Overconfidence is the same trap that led IBM to decide not to invest heavily in the personal computer market. It’s been said that the trouble with ignorance is that it feels so much like expertise.
Here are a few ideas as to how to avoid these traps. First, be aware of these biases. When it comes to business decisions, there is rarely such a thing as a no-brainer. Our brains are always at work when we make decisions. Forewarned is forearmed. Another effective method of avoiding these traps is to have a decision making process that walks the decision maker through a series of logical steps such as defining the question, establishing objectives to be achieved by answering the question, generating answers that are in alignment with the objectives and evaluating risk. By using a process, you’re not turning over the entire decision making process to intuition. Having an effective decision making process actually leads to a final method for avoiding these two common decision making traps. Your decision making process should let you know when it is appropriate to involve others in the decision. You should involve people who are willing to tap you on the shoulder and question your biases or give you another point-of-view. Good luck with all your decisions!
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