Do I have a deal for you! But you need to act today… three other families are VERY interested!
We like to believe that we make decisions based solely on accurate information, logic and reason. But human nature (and the human brain) is such that our decisions are also significantly influenced by other factors. These include emotions, personal biases, memories, and strongly held beliefs. Having incomplete or inaccurate information is also a barrier to more rational decision-making. So is a false sense of urgency.
As expected, many industries capitalize upon these influences. Consider some common tactics used to make sales: creating a sense of urgency and anxiety (the amazing deal which will expire after today; you better jump on this because many others are interested), misleading information (hidden fees; false reassurance about risks; withholding negative facts), appealing to a person’s vanity or identity (“I can see that you’re the kind of guy who knows a good deal when he sees one”), and fear (you need this product to keep you safe; the world is a dangerous place).
We all have unconscious biases which significantly impact our actions and decisions. We develop world views based on our experiences, family, community, education, values etc. Our human propensity is to simplify how we assess information through the filter of these experiences, which can result in false interpretations and errors in judgment. We may selectively pay attention to some things, while ignoring or dismissing others that don’t fit neatly with our pre-existing world view. This usually happens outside of our awareness. Becoming more conscious of our personal biases can help us to make better decisions.
A few examples of (largely unconscious) cognitive biases (there are many more):
- Personal Biases: such as stereotypes, prejudices, generalizations
- Confirmation Bias: selectively valuing or paying attention to information which supports our pre-existing beliefs while ignoring contrary information
- Anchoring Effect: placing too much emphasis on the first piece of information we receive and then not adequately considering other factors in making our decision
- Recency Bias: placing too much value on the most recent information received
- Framing Effect: the same information can lead to very different decisions based on how it is presented to us (making us more susceptible to manipulation)
- Availability Bias: focusing on our own previous experiences, assuming these are more representative of the situation than is actually the case. This leads to failure to gather additional and accurate information to guide decision-making
- Self-serving Bias: attributing positive outcomes wholly to our own actions, while blaming outside forces for negative outcomes ( we often do the opposite for others: their successes are due to luck and other outside forces, while their failures are the result of their own personal weaknesses)
- Sunk-cost Fallacy: continuing down a path that isn’t working well because we’ve already invested time, emotional capital and money in the decision
- Band-wagon Effect: valuing something more than we might naturally because other people desire it
Scenario:
You’re looking to buy a house. You and your partner have made a thoughtful list of the 5 required features to fit your needs, preferences and budget. The first house you walk into is beautifully furnished, and you are shown a lovely master bathroom with an awesome clawfoot tub. And the pantry! The agent alerts you that several other people are very interested. However, it is well outside the commute distance you had identified as a key priority. It is close to a busy street. And it is significantly above your price range. Nevertheless, you are tempted to make a rushed offer on the house due to the warm feeling you had when you first walked in and saw the bathtub, the agent framing the long commute as a way to unwind after work, and the sense of urgency created by hearing about other interested parties. [the band-wagon effect, anchoring bias (bathtub), framing effect (commute), recency bias]
You do make an offer (with an inspection contingency), pay for an inspection, tell all your friends how great the house is, and start the process of listing your current house for sale. You have rationalized to yourselves how the house will be a good fit despite it not matching your initial list of priorities. The inspection reveals several significant problems and you are having serious second thoughts. It is psychologically very difficult to pull out at that point, even if it will save a lot of time, money and stress in the long run [sunk-cost fallacy].
Cognitive dissonance is one other factor worth mentioning. It arises when we behave in ways that are inconsistent with our values. In an effort to relieve the discomfort (such as guilt or embarrassment) that arises from this mismatch, we tend to reject or ignore new information. Instead, we try to rationalize the decision or action; we seek sources that support our behavior, at the expense of being open to more balanced information.
We make a multitude of decisions every day, and luckily many of our decisions are quick, efficient and more automatic (especially familiar situations such as which route we take to work). But for bigger decisions and those involving unfamiliar situations, thoughtful and “informed” decision making can help minimize poor outcomes.
Some tips:
- Make an effort to better understand your personal unconscious biases
- Try to keep an open mind
- Identify what information you are missing and how to go about obtaining it
- Avoid making major decisions when you are feeling strong emotions (anger, fear, anxiety, acute grief)
- Be well rested
- Take time to think things through: slow down the process, “sleep on it”, don’t fall prey to pressure techniques
- Identify and explore different options (a “reasonable” number, not an infinite number, which can be overwhelming)
- Try to differentiate opinions (yours and others’) from facts
- Be open to learning from your “mistakes,” but don’t beat yourself up about poor outcomes. We make many decisions every day, and we can’t get them all “right.” A decision may be well-informed even if the outcome is unsatisfactory, as there are many factors outside of our control (air travel!).
While exploring our own biases is challenging, it can be very rewarding and can help us make more efficient and effective choices.
