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5 ways to stop making bad business decisions

Know some psychological dispositions that influence our decisions without our knowing.
By Anna Johansson |

 

One of the biggest contributors to a business’s success is the entrepreneur’s ability to make good decisions. What makes a “good” decision does not necessitate a guaranteed better payoff, but it does increase your odds of success to a significant degree.

 

For example, if you make a decision based on a coin flip, it may end up working out, but it is still a “bad” decision. If you take your time gathering information, contemplating the possibilities, and calculating the risk versus reward, you are not assured a perfect final outcome—but you will have made a “good” decision.

 

Related: The 5 biggest psychological hurdles of entrepreneurship

 

There are certain psychological dispositions in all of us that influence our decisions without our knowing. These are biases, which may exaggerate certain realities or blind us to logical truths. It is not possible to objectively eliminate these biases, but if you are aware of them, you can compensate for them and end up making better decisions.

 

Here are five of the most common.

 

 

1. The anchoring effect 

The anchoring effect is best described with an example: A car salesman offers you a car for $30,000. When you leave, he catches you and offers it to you for $20,000 instead. Seems like a good deal? What if he had initially offered it to you for $18,000, but when it came time to do the paperwork, he revealed the real price was $20,000?

 

In the former example, you would feel like you were getting a better deal—even though the car and the final price of both examples are identical. Once you catch wind of a number, a trend or even a basic fact, it tends to serve as an “anchor” in your mind that distorts how you view future—sometimes even unrelated—information.

 

 

2. The fundamental attribution error 

The simple way to explain the fundamental attribution error is the human tendency to blame things on the nearest plausible agent. For example, if you get rear-ended by a vehicle, you may instantly assume that the person behind you is a bad driver who was not paying attention, neglecting to consider the possibility that he / she was rear-ended first, or that there was a mechanical failure in the vehicle in question.

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We are wired to jump to conclusions, because fast judgments were once necessary for long-term survival. However, now that we have ample time and information available to us (with not-so-life-threatening repercussions of making extended decisions), it is better to question your first impressions and use data to inform your final judgments.

 

 

3. Confirmation bias 

Confirmation bias exists, because we like to reaffirm our existing beliefs. We subconsciously try to make new information fit into our existing views on the world, because it is easier and requires less reordering in the brain. Unfortunately, it leads us to misinterpret new information at times.

 

For example, if you have made the assumption that the best demographic for your product is teenagers, and you conduct a market survey among only teens that shows a 60% favorability toward your product, this may reaffirm your belief. However, this survey does not prove that another demographic would not be even more interested in your product.

 

Be wary of what types of studies you conduct, what types of sources you consult when researching, and how you interpret objective data. Try to distance yourself from your preconceived notions.

 

 

4. The availability heuristic

The availability heuristic is related to the confirmation bias, because it has to do with how you process information. Put simply, you tend to rely on convenient information to make your decision rather than going through more significant challenges.

 

For example, you might rely on anecdotal personal evidence to a given trend, like how you saw a cousin use your product, rather than more in-depth data, like how your product performed to a random sample of participants.

 

 

5. The overconfidence bias

The overconfidence bias is especially important to note, because it affects entrepreneurs and executives even more than the general population. With this bias, you believe that your own judgments, decisions, and observations are disproportionately more reliable than they actually are.

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For example, you may estimate that you are less prone to make typing errors than the average person and fail to proofread your outgoing proposals, or you may believe your risk calculation to be inherently correct, because you are more skilled at calculating risk than the average person.

 

This isn’t to say you’re overestimating your abilities in every area, but it’s more than likely you are overestimating yourself at least some of the time. Try not to give yourself too much credit.

 

Human beings are not perfect, and no matter how aware of our biases we are, we will never make perfect decisions. However, if you take the information available to you, recognize your own imperfections and work to make all-around better decisions, you will put yourself and your company in a far better chance to eventually succeed.

 

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Copyright © 2016 Entrepreneur Media, Inc. All rights reserved.

This article originally appeared on Entrepreneur.com. Minor edits have been done by the Entrepreneur.com.ph editors.

 

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