Experience often clouds our judgment most times. You would ask how?
Most of us had challenges adapting to the professional way of analyzing business problems, we often generalize situations based on similar experiences we have had in the past. For example, we treated a case in class, “Gravity Payment”.
Gravity Payment is a company that has a philanthropic objective. The CEO decided to raise all salaries to $70,000, including those that recently joined the organization. This decision was to take effect in three years and would take a significant proportion of the profit and about 70% of the CEO’s salary. Many employees were excited about the decision. Because they could now afford to live a life they have always dreamt of. However, some employees left because they felt the decision was unfair and that payment should be commensurate with the job done.
The facilitator asked us to critique the decision made, the first comment was that it was not sustainable”. She then asked why we thought it would not be sustainable. Given that we were gradually becoming Corporate Financial Accounting gurus, a lot of us made the following comments:
- The profit of a business should either be retained or paid to the shareholders as dividends.
- The business cannot afford it.
- The business would not grow etc.
Subsequently, she asked, “what is the objective of the business”.
A Philanthropic one
Only then did we realize we goofed. The bias displayed is referred to as anchor bias. On this note, let us talk about the different types of psychological traps.
Types of Psychological Traps
- Anchoring Trap: This occurs when we analyze a current situation based on past events, trends, or experiences. It always prejudices our thinking in ways that prevent us from making good decisions.
- Status Quo Trap: This is most common among risk-averse people. They prefer maintaining the status quo over exploring other opportunities.
- The Sunk Cost Trap: Sticking to a poor decision because of the fear of being criticized for making a poor decision in the first place. Warren Buffet once said, “When you find yourself in a hole, the best thing you can do is to stop digging”.
- Confirming Evidence trap: Seeking advice from someone already biased about a situation. Hence this would only affirm our preferred option rather than challenge it.
- The Framing Trap: A lot of us fall victim to this. Giving different answers to the same questions framed in different ways.
- Overconfidence trap: Being overly confident about a decision without exploring alternatives. A cause of this is anchoring.
- Recallability Trap: Arriving at a conclusion based on the severity of past experience or memory.
- Base Rate Trap: Making assumptions based on the frequency of an event. For example, the probability of seeing a woman riding a bike for commercial purpose. Some of us would conclude the probability is zero. But it is not.
As we might have observed, some of these biases overlap. We need to continually make conscious efforts to avoid making decisions plagued by them.