Irrespective of who you are, where you’re from or what you do for a living, decision-making is a day to day activity that we all engage in. Some decisions take less effort on our part such as buying coffee in the morning, purchasing a new book, or even getting out of bed; there are a myriad of these that we face on a regular basis. Others, such as revamping an existing business model or continuing to invest into an unhealthy relationship can be quite taxing on our minds. The commonality here is that decisions dictate our day-to-day lives. When you couple the sheer volume of the decisions we make, with the complexity of them, the cognitive load faced by our brains can elicit a sense of panic, resulting in the brain scouring for an easy way out. Those shortcuts manifest themselves in decision-making biases or traps which can yield unfavorable outcomes.
Everyone Wants to be Right
About a year ago, I started investing in the stock market because I wanted to put to use some of the technical skills I accquired in my accounting and finance courses, make a little bit of money, and just expand my knowledge on different sectors. Being a novice investor, I considered conservative options in the market and landed on bank stocks. Prior to conducting my research, I thought TD Bank would be a great option simply because it’s the bank that I use for my core accounts (note the personal bias here). As I commenced researching, I took note of the healthy dividend TD offered its shareholders, their growing retail position in North America, and commitment towards research and development as exhibited by their new Innovation Lab in Waterloo. I recognized all of these great attributes of TD, all the while disregarding reasons not to pursue it as an investment. Without realizing it, I was engaging in confirmation bias.
Confirmation bias is exactly as it sounds. It’s a trap that leads us to seek out information that corroborates our stance while ignoring information that contradicts or goes against it. Not only does this trap effect what we research and where we go looking for answers, but it also impairs the way we interpret data.
Confirmation bias is however avoidable. Actively searing for disconfirming evidence can solidify a decision; this is akin to making a pros and cons list. The catch here is, to be honest with yourself in regards to the vigor with which you seek out both sets of information. Another useful tactic is to have someone play the devil’s advocate and refute your decision. In doing so, the other party can expose faults in your decision and puncture it in ways that you may not have foreseen. Critical to the success of this is to avoid influencing the other party’s decision. Candidly share all of the information equally.
I was fortunate that my leadership professor educated our class on this bias and how to avoid it just in the nick of time. Thanks to him, I have a more thorough approach to the way I vet my investments. Mark, if you’re reading this, thank you!
Key Takeaway: Confirmation bias is when people seek out information to support their own notions while disregarding information that goes against those thoughts. Actively seek out disconfirming evidence to combat this trap.
Anchors Weigh Heavy
Venture a guess here. Do you think the population of Turkey is greater than or less than 35 million?
Now, what’s your best estimate of Turkey’s exact population?
I’m willing to bet, as would the prolific negotiations researcher Howard Raiffa, that your estimate was reasonably close to 35 million.
In his studies, Raiffa has shown participants those pair of questions, using initial arbitrary numbers of 35 million for some participants, and 100 million for the others. Irrespective of the number used, participants were always influenced by the initial piece of data they were given. What’s even more interesting here is that the numbers used were totally arbitrary but still impacted decision-making. This study showcases anchoring in all its infamous glory.
In a nut shell, anchoring refers to the mind giving a disproportionate amount of weight to the first piece of information it receives when making a decision. Essentially, first impressions anchor our minds which consequently impact future decisions. Due to the powerful nature of anchoring, it is a particularly effective tactic used by businesses in their pricing, marketing, and sales strategies, as well as by individuals who are specialists in their field like mechanics, realtors, and even healthcare professionals.
In a group setting, anchoring should be avoided at all costs because it can severely stifle the creative process. During my experience with the Hult Prize, one of my teammates prematurely spurted out an idea for us to work with before we even developed a deep understanding of the problem. Right from the outset, we were anchored on an idea which, as I’m sure my group members will all attest to, was the crux of our teams’ inability to execute on the idea.
The good news is that like confirmation bias, anchoring can be avoided. When it comes to creative group work, members should always be informed and ideate alone before coming together. This allows multiple individual perspectives to be created, thus preventing the first thought shared to be an anchor. Similar to confirmation bias, seeking information from others who have not taken part in the ideation process is also another way to tackle this trap. Lastly, slowing down the brainstorming process to allow for ideas and thoughts to marinate is crucial. Personally, this is a challenge for me because I like to eliminate problems fast and tend to latch on to the first solution at hand. But, preemptively locking down a solution can close off the potential for other, more appropriate solutions.
Key Takeaway: Anchoring is a decision-making bias where our minds give a disproportionate amount of weight to the first piece of information they receive. To avoid succumbing to this trap, do your research, be well informed, and brainstorm on your own before meeting with a team.
Resources Spent are Resources Gone
Coming back to the topic of finances, I should mention that I’m not an expert investor. In fact, I made a woeful decision to buy a stock a couple of months ago, solely because it was rapidly increasing in value, I had a fear of missing out, and let my impulse dictate my actions. Seriously, at that point, it was plain old gambling.
I bought 100 shares in a company and saw my return on investment grow by 26% that day. The next day, it continued its ascent and I gained another 14%. On day three, the stock plummeted and continued to drop until I was in the hole $1000. At this point, I thought to myself: “Hold the stock, it’ll climb back up. These things are cyclic.” And so I held the shares. But it continued to drop. Suddenly I was down $1500 at which point my senses finally kicked in and I sold the shares at a loss. I was a sucker for the sunk cost trap.
A sunk cost refers to an investment – monetary, time, or any other resources – that have been incurred and cannot be recuperated. In effect, future decisions keep in mind the investment and attempt to justify past decisions even when they no longer make sense. Whether it’s refusing to sell a stock at a loss or continuing to support an employee that is clearly a bad fit, sunk costs are prevalent in decision-making.
Sunk costs can be difficult to avoid simply because they require admitting to a mistake. This applies to stocks, employees and even relationships for that matter. If it’s a matter of self-pride, ditch that notion and realize making mistakes is okay. Conversely, consciously pouring resources into a decision that you know is unacceptable, is not okay. This can be particularly difficult in organizations that have cultivated a failure fearing culture. Realistically, if this is the tone of the company culture, resources will continue to be wasted as employees will be unwilling to admit to their mistakes due to fear of punishment. The best way to avoid the sunk cost trap is by realizing the past is a known, negative variable and that the future is an unknown. You don’t have insight into the future so, work with the information you have and make the decision accordingly. Alternatively, as with the other two biases, consult with someone who has no stake in the situation and they can offer a sense of clarity.