Why We Make Bad Decisions

Leaders must make difficult choices under uncertainty nearly every day.

However, human judgment is notoriously prone to irrational and biased thinking patterns that undermine optimal decision-making. In this chapter, we will explore common biases that afflict even experienced leaders, the faulty neurology that produces these biases, and science-based techniques to overcome them by sculpting more rational brain connections.

Anchoring, Confirmation Bias, Sunk-Cost Fallacy, Framing Effects

Numerous cognitive biases skew reasoning and lead to poor judgment. Here we will focus on four of the most impactful biases for leaders.

Anchoring Bias:? This cognitive bias occurs when people rely too heavily on the first piece of information they receive about a topic.?This initial information, known as the anchor, serves as a reference point for all subsequent judgments and decisions.?Even when presented with new information, individuals tend to make adjustments relative to the anchor rather than evaluating the new information independently.[i] For example, if first asked whether the average price of a house is higher or lower than $1 million, people will then guess a higher number than if first asked about a $100,000 house. The brain tends to insufficiently adjust away from starting anchors.

This causes problems when leaders must forecast budgets, sales, completion times, or other unknowns. Anchors like previous years’ financials, past project timelines, or competitors’ pricing indelibly stamp the brain’s estimates. Deliberately considering multiple anchors provides more objective ballpark figures.?

Confirmation Bias: Next is confirmation bias, seeking and interpreting information to to affirm preexisting beliefs.[ii]? ?People readily accept confirming evidence at face value while subjecting disconfirming evidence to extreme scrutiny. In teams and organizations, confirmation bias produces groupthink, echo chambers, and resistance to negative feedback. Leaders must intentionally test their assumptions and play devil's advocate against their own ideas.

Sunk Cost Bias: The sunk-cost fallacy involves continuing pursuit of ?failing projects purely because past resources were invested, even when future prospects remain poor.[iii] Throwing good money after bad is irrational, but people devalue current costs over past sunk costs. The brain overly weights prior effort and loss aversion. Regularly evaluating future potential separate from past efforts aids better go/no-go decisions.

Framing: Framing effects occur when emotionally charged words skew objective calculations. People take greater risks to avoid sure losses than to achieve equivalent gains.8 The brain reacts strongly to loss frames, distorting numerical logic. Leaders should counteract framing by using neutral language and focusing on absolute figures.Flawed wiring and chemistry underlie these mental pitfalls. Knowing the neuroanatomy involved equips leaders to recognize and short-circuit biased thinking.

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Strategies Using Neuroplasticity to Overcome Biases

Leaders can retrain their malleable brains to reduce biases through deliberate practice. Four effective strategies harness neuroplasticity.

·?????? First, adopt opposing mindsets. Argue against your own ideas and decisions to target confirmation bias.[iv] ?Seek disconfirming evidence and contrary opinions. This repetitive mental exercise strengthens brain connections supporting objective reasoning.

·?????? Second, expand perspectives. Consult advisors with very different backgrounds to avoid groupthink.[v] Imagining stakeholders’ contradicting viewpoints increases empathy and integrative thinking underlying wise decisions.

·?????? Third, establish systemized processes. Use structured rubrics for evaluating ideas and weigh pros and cons separately. Routinizing constructive reasoning breaks often- harmful intuitive shortcuts. Checklists safeguard against distorted intuitive judgment.[vi]

·?????? Finally, take decision hygiene breaks. Sleep, exercise, and meditation improve cognitive control networks underlying rational thinking.[vii] Reflecting after letting decisions marinate reduces reactive emotions. Healthy brains make balanced judgments.

In summary, the brain defaults to biased shortcuts that cripple judgment. However, leaders can rewire neural circuits toward rationality through deliberate, scientifically grounded techniques. Wielding the plasticity of the mind against itself forges wise, unbiased decisions.

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References:

[i] Tversky, A. & Kahneman, D. (1974). Judgment under uncertainty: Heuristics and biases. Science, 185(4157), 1124-1131. https://doi.org/10.1126/science.185.4157.1124

[ii] Nickerson, R. S. (1998). Confirmation bias: A ubiquitous phenomenon in many guises. Review of General Psychology, 2(2), 175-220. https://doi.org/10.1037/1089-2680.2.2.175

[iii] Arkes, H. R., & Blumer, C. (1985). The psychology of sunk cost. Organizational Behavior and Human Decision Processes, 35(1), 124-140. https://doi.org/10.1016/0749-5978(85)90049-4

[iv] Lord, C. G., Lepper, M. R., & Preston, E. (1984). Considering the opposite: A corrective strategy for social judgment. Journal of Personality and Social Psychology, 47(6), 1231-1243. https://doi.org/10.1037/0022-3514.47.6.1231

[v] Phillips, K. W., Liljenquist, K. A., & Neale, M. A. (2009). Is the pain worth the gain? The advantages and liabilities of agreeing with socially distinct newcomers. Personality and Social Psychology Bulletin, 35(3), 336-350.

[vi] Kahneman, D. (2011). Thinking, fast and slow. Farrar, Straus and Giroux. https://hbr.org/2011/06/the-big-idea-before-you-make-that-big-decision

[vii] Dresler, M., Sandberg, A., Ohla, K., Bublitz, C., Trenado, C., Mroczko-W?sowicz, A., Kühn, S., & Repantis, D. (2013). Non-pharmacological cognitive enhancement. Neuropharmacology, 64, 529-543. https://doi.org/10.1016/j.neuropharm.2012.07.002 ??

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