This is serious…
And it might come as a surprise, but from time to time, I’ve been known to make bad decisions…
And weirdly, some of my clients do too.
Bad decisions will cost you money, cost you time and eat into your profits. In the worst case, one bad decision can totally kill off your business.
Actually we all make bad decisions, and most of these “mistakes“ are not caused by a lack of knowledge or a shortage of skill. Often they are errors in judgment, caused by one or another of the basic personality flaws, the kind that are deeply imbedded in our brains and our culture.
What follows is the first half of a list of common ways entrepreneurs – and other people – decide the wrong way to do the wrong things.
I adapted this from something I saw in a quirky book called “Seeking Wisdom – From Darwin to Munger,” by Swedish author Peter Bevelin.
They say that recognition is the first step on the road to recovery. If you’d like to make better decisions and avoid some mistakes in the future, it would help to first understand how you make them.
Study the list, zero in on the parts that apply to you. Resolve to, at the very least, notice when you are making these mistakes, and fix them.
Okay, here goes:
1) Liking things similar to the things you already like.
If you like “A”, you are predisposed to think well of anything similar to “A.” This is the basis of a lot of advertising. After all, why do we say sex sells? Because we like sex, and, by association almost anything else. If I like playing golf, I may be predisposed to think that golf products make good investments. (They generally don’t.) The same mistake goes for disliking “B.”
2) Underestimating the power that rewards and punishments have on our thoughts and actions.
People are biased towards taking action and moving towards whatever we are incentivized to do, and we try avoid doing what will get us punished. As decision makers the trick is to explicitly understand the rewards and punishments implicit in the decision you’re making. For instance, you end up making a purchase decision based on the recommendation of a salesperson who is paid a special bonus for selling that product during a promotion, without considering that their expert opinion is biased.
3) Forgetting that people act primarily to serve their self-interests.
This is related to the mistake above. People ALWAYS act to increase their personal self-interest. This is fine (and to be expected) as long as your interests align with theirs. The problem is that realizing this may lead you to think that people’s actions are guided by some higher truth. For the most part, they are not.
4) Having an unrealistically high opinion of our own abilities, and tending toward seeing a rosy future.
As an entrepreneur you probably have a pretty high opinion of yourself. And just as likely, you’re optimistic about the future. Together these two qualities make it hard for you to evaluate the potential success of a project, especially one that hinges on your personal skills, abilities and business acumen. After all, you’re going to make it happen, aren’t you? How could it be any other way?
5) Wishful thinking and other distortions to reduce perceived pains.
When you are in some kind of pain – physical or emotional or financial— any kind of discomfort – you tend to act on things you believe will alleviate that pain. And your belief that something will help grows stronger the longer the pain goes on. After a while anything with a remote chance can look like a winner. Wishful thinking starts to seem quite grounded, and grasping at straws feels like anything but.
6) Being consistent with past decisions.
Psychologist Robert Cialdini makes this point in his book, “Influence.” He calls it “commitment and consistency,” and says that you’ll act in a way to confirm that your past decisions were the right ones. Deal makers use this against you when they repeatedly offer things to which you can easily say “yes,”making it so much easier to say “yes” to something big.
7) Bias towards maintaining the status quo
Most people don’t like change. It’s hard-wired into the species dating back to prehistoric times when any change meant some kind of danger. Most of us will go to great lengths to not have to change, including sticking with employees and vendors and, yes, clients, long past the time we should have parted ways.
8) Impatience – having a greater concern and valuing more things in the present, than things in the future
It’s easier to make a decision in favor of something we think will bring gains today or tomorrow than for a strategy or a project which may take months, even years, to materialize. This means a fortune-changing project can get sacrificed to something mediocre with a short-term payoff.
9) Comparing things to some random “standard” rather than looking at quantities objectively.
This one is weird. Most of us hate abstraction and don’t like to think about things without some reference standard. We’ll compare quantities, even when the underlying things we’re quantifying have nothing to do with each other. Nassim Taleb talks about a study where people who were asked to share the last four digits of their social security number unconsciously used those numbers when estimating the number of dentists in New York City. (I said this was weird.) Taleb calls it anchoring. This introduces a certain randomness into your evaluations, unhinging them from any kind of objective reality. It’s easy to manipulate people this way. Start your negotiations with a firm declaration of the true value: “It’s worth every bit of $2 million, and I won’ take a penny less.” Your counter-party offers an absolute top price of “a million and a half.” You would have been happy with $900,000.
This is another one from Cialdini. Reciprocation is another hardwired trait, and is critical to the tribal structure of people, the ultimate purpose of which is to insure survival. We are willing to do people favors and kindnesses now, because we know they’ll pay us back in the future. All well and good, but in the future, you may find yourself making a bad decision because at a certain level you are driven to pay back the favor.
I said this earlier, recognition is the first step on the road to recovery, and understanding your how your mind works will pay tremendous dividends in making the right decisions. And making the right decisions will pay huge dividends in terms of sales, profits, happiness and satisfaction.
What do you think?
Do me a favor and post your comments below. I’ll pay you back some time soon.