Well, some of our most common decision errors are in the selection and synthesis of data and the analysis and presentation of relevant information. Further decision-making difficulties arise in the way we think. Daniel Kahneman, in his book, Thinking Fast and Slow, presents strong evidence that we rely on heuristics without giving ourselves sufficient time to reason through decisions. You might want to read the book or watch the Inc Magazine idea lab interview with Daniel Kahneman. Another great video on decision heuristics as they relate to our ability or inability to estimate probabilities and make decisions is the Ted Talk by Dan Gilbert. We could have a whole course on decision heuristics, but I'm going to introduce just a couple of the heuristics that I hear most often from corporate leaders. The one I hear the most often is the sunk cost effect. This is our tendency to keep throwing money at something or time at something, a project or a person because of the time or the money that we put into that something or someone in the past. How often in your organization does a project go over budget or fall further and further behind schedule while we continue to invest more money and more time into it? Have you ever heard your leaders say, "But we've spent so much time on this, we can't give up now." If you've run 20 miles of a 26 mile marathon and you're exhausted and you think, should I give up? The answer is no. Because when you think you've used up a 100 percent of your energy and you tell yourself you have 25 percent left, I'm willing to bet, you'll be able to keep going. But if you sprained your ankle on mile 20, the ankle your doctor told you if you keep spraining you might never run again, do you keep going? No, sorry. Stop. It's the same for that project. The money you spent is a sunk cost. You can't get that money back. What you do now is reevaluate. How long will it take going forward? How much will it cost to complete that project? Given that, what is the return on investment? You don't include your previous expenditures, that money is gone. The question is, what is the return on the investment of the money you need to spend going forward to finish the project? Then what else could you be doing with that time or money? Are there other initiatives that are just sitting on the shelf that have a higher return on investment? Given what you've learned from your over-budget project, make sure that any estimates for other initiatives you have sitting on the back burner are correct. If you have another project with a higher return on investment than yours could get going forward, you got to let go of this project and invest in the other. We see this in so many areas of life. The Everest climber who promises himself that if he hasn't submitted by 2:00 PM, he'll turn around. Because after that time, he will not have sufficient oxygen to return. At 2:00 AM, his alarm goes off, but he does not turn around. He thinks, "I spent so much money and effort just getting here. I can see the summit. I've told everyone I'm going to summit Mount Everest. I can't turn around now." Yes, pride can be a sunk cost. Examples in our personal and professional lives abound. From the way we gamble, to the way boards of directors stick with poor performing CEOs, to the professional ball players who get the most playing time, sunk cost is a frequent and expensive decision-making heuristic. Anchoring is when we rely too heavily on the first piece of information offered, using it as a reference, even if that data is completely unrelated to the choice we're making. Dan Ariely and his colleagues have shown that simply writing down the last two digits of one's social security number influenced how much money a person would bid on a bottle of wine and other items. Consider this when someone is asking for a raise or for money for an investment. When my son was in the 7th grade, he needed boots for what we in the US call soccer. We scheduled a day after I came home from work to shop. I hadn't done any research, but I figured only to spend maybe $50. The boots were for a 12-year-old, how much could they cost? During the day, he sent me an email that said, "Don't worry, I won't ask for these, haha." There was a picture of gold soccer shoes and a price tag of nearly $400. I laughed, haha, but I'll be darned if I didn't spend some a $125 on the boots I bought him that day. People anchor us all the time. Don't let a salesperson or an aggressive employee do it to you. The framing effect is where we're going to be willing to take a bigger risk if we fear a loss than we would if we hoped for a gain. The employee who tells you, "We have to invest in this new equipment or we'll lose sales to our competitor." The boss who says, "If I give you the resource you're requesting, I'll have to reduce your resources next month." The customer who says, "I need you to give me this better deal or I'll have to buy from your competitor." They're all using our natural fear of losing. We're more likely to make a decision that does not really serve us if we're protecting ourselves from a loss. If you don't believe me, play the game at philosophyexperiments.com called Framing the Epidemic and see for yourself. It's based on the work by Daniel Kahneman and Amos Tversky in their 1984 study titled: Choices, Values, and Frames, which was published in the journal, American Psychologist. Here are just a few more of the many cognitive biases that interfere with quality decision-making. Confirmation bias. We seek and rely on information that will confirm what we already believe. We not only avoid data that will contradict our preexisting views, but we will also believe more strongly in something after being provided evidence that contradicts that thing. Conformity bias. We seek to minimize conflict by suppressing dissenting views within our group, even our own. Similarly, the shared information bias where our work group spend more time and give more importance to information we all share than to information known by a minority of group members. This often has the effect of limiting the expression of privately held, yet critical information, thereby, reducing the likelihood that a decision will be made using all potentially available meaningful data. The halo effect is when we attribute positive characteristics to a person or group based on other positive characteristics that person or group holds. For example, we believe that rich people are smart and attractive people are good. It's why nearly 60 percent of Fortune 500's American CEOs are men over six feet tall, while fewer than 15 percent of American men are over six feet tall. The self-enhancement effect. We believe ourselves to be morally superior to others. A 1997 poll published by US News and World Report, found that 87 percent of Americans believed to themselves likely to go to heaven, but only 79 percent believed Mother Teresa had the same chance. When I ask students if they think other people are trustworthy, some good percentage of them will say no. When I ask those same students if they themselves are trustworthy, nearly all will say yes. How about their family? How about their friends? Yes. Basically, we think that we and the people we surround ourselves with are good, trustworthy people. But everybody else, anybody we don't know, is untrustworthy. While it's a good idea to be cautious and protect ourselves, it is also true that the self-enhancement effect can, as Cindy May writes in Scientific American, reduce our willingness to cooperate or compromise, and it creates distance between ourselves and others. The belief we are ethical people makes us less likely to evaluate our actions and decisions through an ethical lens. Why would we? Of course, we're going to do the right thing. On top of all these, we all have biases regarding different ethnicities, casts, and first languages, and those who have different gender identities and sexual orientations. Because those of you taking this course come from all over the world, I cannot say for sure what you're likely biases are. I can say with confidence, regardless of who you are or where you come from, there's a good chance that you hold some bias. Even in the workplace, you'll see that divisions and departments have prejudices against each other. Maybe the engineers believe themselves to be intellectually superior to marketers. Or the marketers believe themselves to be more creative than those in accounting. Look around your own organization and see what the prejudices are. Ask yourself, how do intergroup biases and rivalries interfere with high quality decision-making?
