Habitual ways of thinking that can trip you up
We all use shortcuts in our decision-making. If we didn’t, we’d waste huge amounts of time making the myriad routine decisions that daily life requires. So we use rules of thumb, educated guesses and that most uncommon of human senses, common sense. But in making decisions that are not routine, these hardwired mental shortcuts can trip us up. Let’s look at a handful of built-in biases that are so prevalent we don’t even notice them. Sometimes even being aware of how our brain works in certain situations can help us protect ourselves from decisions that could have a negative outcome.
- We tend to get attached to the first information we receive about any given topic, using it as a baseline with which to compare incoming information while resisting anything that may be incompatible with what we first heard. This is such a hard-wired process that it is difficult to guard against it, but taking a contrarian approach can help. Deliberately exploring other ways of thinking about the situation will help you find fresh points of view, as will asking the opinions of other people and finding alternative sources of information.
- Change is uncomfortable and takes effort, so we resist change and try to find ways to justify or reinforce the existing situation. By doing nothing, we are trying to shield ourselves from criticism or regret if we make a mistake. To nudge yourself into moving towards change, ask yourself if the present situation is favouring progress towards your goals, or is it actually creating obstacles to what you want to achieve. It can be helpful to imagine a blank slate: if you could start over, is the status quo the situation that you would choose? If not, what would you choose instead? What actions would you have to take to make that happen?
- When it becomes clear that we have made a mistake in our decision-making process, we keep trying to fix the situation rather than acknowledging the error and moving on. We are trying to salvage resources of time, energy and perhaps money that we have already spent: an investment that has gone south, for example, or a hire that has not worked out. Rethinking the original decision and noticing variables that were unknown at the time, or have changed since, can help you pull out of a losing spiral. Consulting others who were not involved in the original decision-making process can also be helpful.
- We tend to look for information that validates our point of view, and ignore or reject anything that doesn’t. Behavioural scientists tell us we do this for two reasons: firstly, because we decide what we want to do before we look for reasons to do it; and, secondly, because we are more drawn to arguments that support something we like rather than something we don’t like. To protect ourselves from ourselves in this situation, we should be wary of arguments we accept too easily, and deliberately seek countervailing opinions and information. One approach would be to ask a friend or colleague to present an opposing argument to the stance you have taken. As business leaders, we must struggle against groupthink, and maintain an environment where people feel free to express opposing views.
Many situations call on us to predict what is going to happen next. When even experts with access to masses of data often make inaccurate predictions in complex, uncertain environments, such as stock markets, we should not expect to do better. It is obvious how overconfidence can lead to a fall, but we are less suspicious of its opposite, over cautiousness. Making a decision based on the ‘worst case scenario’ may seem wise, but making allowances for extreme situations that have a tiny chance of happening can be more costly than is warranted. We are also strongly influenced by our most recent – and therefore, most vivid – memories. For that reason, we tend to predict that the future is going to continue on the same trajectory as the recent past.
"To err is human, but becoming aware of the ways in which we are likely to make mistakes may make those errors less common.
It is becoming very clear that our ability to evaluate risk is hedged by all sorts of cognitive biases. It’s a miracle that we get anything right."
Daryn Form is a Senior Financial Advisor with Assante Capital Management Ltd. providing wealth management services to principals of family-owned and privately held companies. The information mentioned in this article is for general information only. Please contact him to discuss your particular circumstances prior to acting on the information above. Assante Capital Management Ltd. is a member of the Canadian Investor Protection Fund and is registered with the Investment Industry Regulatory Organization of Canada.