Traps in Decision Making

Decision making is an important activity, not only for executives but for everyone in the world. In our day to day life, we make lot of decisions. Starting from choosing between chocolate and strawberry to life and death, we make tons of quick decisions unconsciously. Some of these decisions may not be so important but some can be really vital and may result in disaster. We choose actions from opinions via mental processes which are influenced by biases, reason, emotions and memories. 

While pursuing AMDA Silver certification, I came across a white paper on Decision Making which explained lot of interesting hidden traps that a decision maker may ignore while decision making. In this blog, I would like to share some of those common traps which we should avoid while making a decision.

Anchoring Trap: When considering a decision, mind gives disproportionate weight to the first information it receives. You can try it!! If I ask you two questions:

a)     Is the population of Kazakhstan greater than 20 million?

b)     What is the population of Kazakhstan?

If you are like most people, you’ll answer a value closer to 20 million. The figure of 20 million which is chosen arbitrarily, will bias your answer.

Technique to overcome:

• Think about the problem on your own before consulting others to avoid becoming anchored by their ideas.
• Always view a problem from different perspectives. Try using alternative starting points and approaches rather than sticking with the first line of thought that occurs to you.

Status-Quo Trap: The Status Quo trap is where our decision making is biased towards the current situation (status quo), usually in a subconscious attempt to protect our ego from failure. The status quo is the “safe” option (wink).

In one experiment, a group of people were randomly given one of two gifts of approximately the same value, half received a mug, and other half got a large, Swiss chocolate bar.  They were told that they could easily exchange the gift they received for the other gift.   While you might expect that about half would have wanted to make the exchange, only one in ten actually did.  The power of status quo kicked in within minutes of receiving an object.

Other experiments have shown that the more choices you are given, the more pull the status quo has.  Why?  Because more choices involve more effort, while selecting the status quo avoids the stress of making a choice :-) 

We should remember that in any given decision, maintaining the status quo may indeed be the best choice, but we don’t want to choose it just because it is comfortable.

Technique to overcome:

• Never think of the status quo as your only alternative. Identify other options and use them as counterbalances, carefully evaluating all the pluses and minuses.
• Always remind yourself of your objectives and examine how they would be served by the status quo. You may find that elements of the current situation act as barriers to your goals.
• Ask yourself whether you would choose the status quo as an option if it wasn’t already the status quo.

Sunk-Cost Trap: This one is my favorite!! Sunk Cost bias is one of the most common and difficult to avoid mind traps. Sunk costs are costs that have already been incurred and cannot be recovered. Let’s take this example -

Three months ago, your eight-year-old car suddenly needed serious engine repairs. Faced with spending Rs.75,000 on the engine work or junking the car and buying a new one, you decide to repair the car. Now however, your transmission is shot and the car needs another Rs. 2,25,000 in work. Alternatively, you could sell the car for Rs. 2,00,000. You know the car will likely continue to need work. What do you do?

If you are like most people, you will decide to fix the transmission, not wanting to “lose” your Rs. 75,000 that you spent on the first round of repairs. But that is the wrong decision. Would you make the same decision if the work had been done by a friend for free? Probably not…yet that is how you should think about the problem. What matters NOW is the current condition of the car and the economic pros and cons of the two alternatives. The past has past and is now irrelevant to your current decision-making.

We tend to make choices in a way that allows us to justify our past choices.

Warren Buffett has rightly said –

“When you find yourself in a hole, the best thing you can do is stop digging”.

 Technique to overcome:

• Seek out and listen carefully to the views of people who were uninvolved with the earlier decisions and who are hence unlikely to be committed to them.
• Be on the lookout for the influence of sunk-cost biases in the decisions and recommendations made by your subordinates. Reassign responsibilities when necessary.
• Don’t cultivate a failure-fearing culture that leads employees to perpetuate their mistakes. In rewarding people, look at the quality of their decision making (taking into account what was known at the time their decisions were made), not just the quality of the outcomes.

Confirming Evidence Trap: We often look for evidence or opinions that will support and justify our own position or decisions and place more weight on these issues than they deserve. Let’s see this example:

For a while you have been concerned that the stock market has gone too high and you have all but decided to sell most of your portfolio and invest the cash in a money market mutual fund. But before you call your broker, you decide to do one more thing to check the wisdom of selling. You call a friend, who you know sold out her portfolio last week, to find out her reasoning. She presents you with a strong case for an imminent market decline. What do you do? 

If you are like most people, you will justify your decision to sell based upon your friend’s actions and rationales. This is an example of the Confirming Evidence Trap. This trap leads us to seek out information that supports our instinct while avoiding information that contradicts our intuition. Would you have expected your friend to have provided you with a balanced or even alternative position to selling out, when that is exactly what she just did?

The confirming-evidence bias not only affects where we go to collect evidence but also how we interpret the evidence we do receive, leading us to give too much weight to supporting information and too little to conflicting information.

Technique to overcome:

• Always check to see whether you are examining all the evidence with equal rigor. Avoid the tendency to accept confirming evidence without question.
• Get someone you respect to play devil’s advocate, to argue against the decision you’re contemplating. Better yet, build the counterarguments yourself.
• Be honest with yourself about your motives. Are you really gathering information to help you make a smart choice, or are you just looking for evidence confirming what you think you’d like to do?

Framing Trap: How a question is framed can have a marked impact on the answer you select. A common framing trap is to frame a question in terms of gains or losses. Studies have shown that in situations where respondents were asked to select between 2 alternatives of equal value if the question was posed as a gain, then people respond by being more risk averse – they select the least risky option. However, if the same question is posed in terms of avoiding losses, then most people become risk seeking – they would select a riskier option. Let’s see this example that elicit different responses when frames use difference reference points:

Let’s say you have $2,000 in your checking account, and you are asked the following question –

a)     Would you accept a 50-50 chance of losing $300 or winning $500?

Now, what if you were asked a different question –

b)     Would you prefer keeping your current checking account balance or accepting a 50-50 chance that would result in having $1700 or $2500 in your account?

Although your answers to both questions should, in theory, be the same, studies have shown that many people would refuse the first chance but accept the second chance :-) Their different reactions result from the different reference points of the two frames. The first frame, with its reference point of 0, emphasizes incremental gains and losses, and the thought of losing triggers a conservative response in most people’s minds. The second frame, with its reference point of $2,000, puts things into perspective by emphasizing the broader financial impact of the decision.

Technique to overcome:

• Don’t automatically accept the initial frame, even if you framed it yourself.
• Pose questions in a neutral manner that uses both gains and losses.
• Think about the framing of the problem and be aware of its potential impact.

The best protection against all such psychological traps is AWARENESS. Forewarned is Forearmed.

Although, we can’t completely eradicate the distortions ingrained into the way our mind works, we can take action to understand and avoid these traps. In this way, we can increase our confidence in the choices/decisions we make.

That’s it for today. Hope it helps!!

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Published on my offical blog on 12-June-2012