How Well Do You Make Decisions for Your Business?

Our clients know that our secret sauce in helping them grow and make sure they own a saleable company when it’s time to exit, is that we focus on eliminating thinking and decision habits that keep delivering the same mediocre results.

Want to know how often you get stuck on your six lane highway of habit with respect to the decisions you make in your company? Let’s check in with the behavioural finance experts Yale’s Robert Shiller and GMO’s James Montier. They are echoing the patterns that we see in business.

Apparently, we are all overconfident in our ability to predict the outcomes of our decisions. But recognize, it’s not because you are a good predictor, it’s because you are using familiar thinking patterns that give you a result you feel comfortable with. Hence you then have confidence.

Anchoring, is related to over confidence. We go with the first information we get in. Then later when we get contrary information, we don’t use it to adjust our thinking and decisions, we double down on the same course of action… just to prove we are right. Because apparently (and we know it is so true after working with more than 100 companies and their owners), we need to feel good about ourselves in priority over getting the decision right.

Representativeness means that we believe that if it happened before, it will happen again (that six lane highway of habit taking over). Yes, history does repeat itself a lot in our lives, because we like to stay in our comfort zones (cue music for “My Way”). But the impact of this belief is that we ignore critical information that should make us stop in our tracks and re-consider.

Loss Aversion is also a six lane highway of habit phenomena. It ties right in there with the need to feel right to feel good about ourselves. We hope that our predictions will prove out, our decisions will get us what we want, but in the face of evidence to the contrary, we hold on, hoping the tide will change and we’ll at least break even. So we continue to do what we have always done all the while expecting different results. Crazy making for the people watching our every move (employees?)

After a few trips down that Loss Aversion highway, we then tend to revert to the other end of the spectrum. Regret minimization is where we stop trusting our choices and don’t make any decisions that could put us back into that terrible feeling of being wrong. This that ‘woulda, coulda, shoulda’ phase that strangles progress.

Regret often leads you to stop being your own authority about what’s right for the company and start looking at competitors, industry trends and the economy to tell you what to do. This ‘copy-cat’ syndrome is called Frame Dependence. This phenomena happened as the economy weakened. Many business owners looked around and said, ‘well if they’re taking a step back, we should too.’ They collectively created the economy that contracts. Not every business leader did that. Many took advantage of the situation and made innovations and bold moves that captured larger market share and better profits. They freed themselves from Frame Dependence.

So why do we engage in such self-limiting and self-defeating behaviour? It’s all because of semi-conscious defence mechanisms. We avoid anything which says it must be my fault. We are a world of blame avoiders and this behaviour is costing companies massive profits. Which is why we spend so much time helping our clients become aware of the defences that get in the way of making the best decisions for the company.

So do you have any of these thoughts cluttering up your mind every day? Start paying attention to them because this is the lethal stuff that turns on your defence mechanism and turns off your smart capable brain and self-authority:

  1. “If Only” Thinking. If I had done this and not that then I would have been right. But of course you can’t go back and change the facts about what did or did not happen. So stop using brain power to try to do that.
  2. “Almost right”. Nice thought, but again a waste of your brain time. The decision didn’t work out as you had hoped. Face facts. Look for the silver lining. Learn from what you did or didn’t do. Now those are the questions that will help you get the result you really want.
  3. “It just hasn’t happened yet”. Yes. Maybe. Maybe not. How long do you want to wait to prove you are right. And how will you deal with the impacts if you are not right?
  4. “It’ll go our way, I just know it”. Great rationale when only one part of the decision appears to be wrong. Read number 3 again.

To read more about this research go to http://business.financialpost.com/2012/10/18/7-ways-your-brain-is-losing-you-money/

Add comment

Security code
Refresh

Subscribe

Want to receive more insights on business performance or making your business saleble?