The defining role of a manager or business owner is to make decisions, and no matter how many books we read or courses we attend, we are all still prone to making poor decisions caused by our own innate ways of thinking.
This often occurs because we fool ourselves through our own psychology – it’s called cognitive bias. This and the next two blogs will help alert you to the common ways in which we fool ourselves and how we can sense check our decisions and make them just that little bit better.
Entrepreneurs are born optimists – they have to be. But they are often disappointed when the new product or service they launch, expecting marvellous results, disappoints. There has been an investment in time and money, which would not be made if only they knew then what they know now.
Overconfidence
We’ve already alluded to this. It’s borne out of several aspects: the first is that our knowledge is limited for something which is new and we don’t know how limited. But we know we have to make a decision, even though we don’t know what we don’t know. Being optimistic means that we perceive risk differently – specifically we perceive things to be less risky than they really are and we do not easily measure risk accurately. We’ll have a whole blog on risk later. Overconfidence also means that we tend to believe what we want to believe. We find a fact that supports our case and then try and find other facts the support the first one. It’s hardly scientifically rigorous but it’s quick. And we have no time! So we decide.
Remedying overconfidence
We can avoid these issues by making sure we check our facts and give due weight to all the facts we get, even if they do not support our case. Make sure you systematically gather information so that you know you have a broad base on which to make a decision. And also remember – particularly in the case of a new product or service – that sometimes the things you decide not to do make you wealthier than the things you do decide to do.
Confirmation bias
This follows very easily from the overconfidence element as we only look for things which we think will give us the result that we want. We don’t look at statistics very thoroughly as we don’t understand them. Another blog on that later, with no sums. We talked in an earlier blog about avoiding groupthink and this is one of the remedies for confirmation bias, along with ensuring that you talk to a whole range of people who may not agree with you because their insights might be just as valuable even though you may not want to hear them.
Gamblers fallacy
This is when we make a decision based on past events which actually has no bearing on the existing situation at all. This is mentioned in Uncertainty brings Prosperity. The simple example is a coin toss. We toss the coin 10 times and it comes down heads seven out of the 10. We might gamble that will come down heads again – many people would. Statistically the odds are 50-50 each time so you should bet that way. We may assume that because our investment decisions have been good so far our next decision should be equally good. It’s an interesting use of logic! We have seen clients make that assumption incorrectly and it’s cost them dearly. They will assume that because they’re good at their existing business that a new venture which they know very little about will be equally successful. It can take years to recover from that mistake.
Remedying the gamblers fallacy
Don’t look chronologically, don’t assume! Drill deep into the data and believe what you see so you don’t just see what you want to see. Are there any patterns in the successful ventures you’ve done so far which are repeated or not in this next idea that you want to launch? Are those patterns valid in this new area?
Don’t jump in – stop, reflect, ask other people especially those with broad business knowledge. We can sense check your ideas realistically to give you the best chance of success. We may see risk where you cannot. That’s not being negative, it’s being realistic. Optimists, remember, (that is probably you) describe realists as pessimists.