How many decisions have you made that end up losing you money?
Everyone wants to be known as rational and logical. Being able to make an informed decision is just as crucial for businesses as it is for individuals.
As much as we try to make the right decision, however, our brain tends to rely on mental shortcuts, or “biases” to get us through the day. Unfortunately, many of these shortcuts are stupid and WILL cost you money.
The Halo Effect
The halo effect is when people make judgments on someone based on how they feel about them emotionally. Studies have shown in the past that strangers rated attractive people higher in intelligence, kindness, and lifelong happiness as opposed to unattractive people. When you’re trying to hire someone, are you hiring them for their looks or on their merits?
Anchoring is when we put more emphasis on the first piece of information we receive and use it as a focal point for all future information.
For example, the first price offered when buying a used car tends to set the standard for the rest of the negotiations. If the salesperson asks for at $50,000, you might be satisfied with negotiating the price down to $40,000, even if the car was really only worth $10,000.
Sunk Cost Fallacy
This is probably one of the most famous mental roadblocks that gets in the way of making a decision.
Imagine this. You’re running late for a meeting on the 5th floor, and you wait in front of the elevator. Three agonizing minutes go by, but there’s no sign of the elevator. Rationally, it would make sense to just go and take the stairs, but you resist that idea. You’ve already spent so much time waiting for the elevator that it would be a waste of time to give up now!
If you’ve ever been in this situation, you’ve experienced the terrors of sunk cost. Although this example may seem trivial, it’s much more serious if you’re debating whether or not to pull the plug on a failing project. Sunk cost is when we become too attached to something that you have already invested a lot of time or money into. This can become devastating when it comes to matters of budget.
How do I avoid these biases?
The reasoning behind all three of these is very similar. Here are quick lists of tips that will help you recognize and avoid these heuristics.
- Keep a cool head at all times and try to look at objective facts instead of relying only on “gut feelings” or emotion.
- How have others reacted in similar situations as yours? If you have records of past projects (or lessons learned), go back and evaluate what others have done before you.
- Try asking a colleague who may not be as emotionally invested as you for some advice. Do they agree with your reasoning or are their opinions vastly different?
Finally, don’t let yourself get too attached in the early stages of a project. It’s important to know when to cut your losses and try something new. If you know these biases are coming, you will have a better chance of avoiding them.