Hidden Traps That Can Affect Decision Making – Part 3

This final part on the hidden traps of that can affect decision making comes with predicting events of the future. They are often regarded as making estimates and this judgements about these variables and responses thereafter. We find ourselves making estimates and projections about uncertain events that is yet to occur.

The Estimating and Forecasting Traps

The managers are known to regularly make estimates and projections of events and only get few feedbacks of the accuracies of those predictions.

Researchers have opportunities and data to maintain records of their forecasting abilities. As for others who are not in this category, they scarcely have enough data to adequately calibrate our minds to make reasonable estimates in the face of uncertainty. With all the different traps already discussed so far, we are confronted with the decision of uncertainty.

But there are other set of traps that can have a particularly distorting effect in uncertain situations because they cloud our imagination and ability to assess probabilities.

Looking at some of the most common of these uncertainty traps:

The Overconfidence Trap

Most often we are not actually good about making estimates or forecast, but our overconfident and abilities to predicting accuracy, and often leads to accuracy and judgment which translate to bad decisions. There is the need to think of the implications on business decisions where major initiatives and investments often hinge on ranges of estimates. A manager who underestimates the high end or overestimate the low end of a crucial variable, are likely to miss attractive opportunities or expose themselves to far greater risk than they realise. The bad decision results to loss of investment.

The Prudence Trap

At this stage, forecasters are usually very cautious, or prudence sets in. When faced with high stakes, they tend to adjust their estimates or forecasts with prudence, “just to be on the safe side.” An example for this trap is called “worst-case” scenario, which can add enormous costs and no practical benefits. In trying to act too much prudence, it can as well dangerous as too little.

The “Recallability” Trap

Even when we are neither overly confident nor unduly prudent, we can still fall into the trap of basing our predictions or forecast on memories of past events. When we recall a dramatic event in our life and the strong impressions it leaves in our minds and can affect future decision-making efforts.

Anything that hampers our ability to recall events objectively will distort pending probability assessments.

Surprising way of thinking about It.

The best way to take a very disciplined approach is to make forecasts and judgment probabilities:

The precautions that can be taken are as follows:

• To reduce the effects of overconfidence when making estimates, always start by considering the extremes: the low and high ends of possible range of values. This will help you avoid being anchored by an initial estimate. Then, challenge your estimates of the extremes, as well as those of your subordinates and advisers.
• To avoid the prudence trap, always state your estimates honestly, and explain to anyone who will be using them that they have not been adjusted. Emphasize the need for honest input to anyone who will be supplying you with estimates. Test estimates over a reasonable range to assess their impact.
• To minimize the distortion caused by variations in “recallability,” carefully examine all your assumptions to ensure they are not unduly influenced by your memory. To get actual statistics whenever possible and avoid being guided by impressions.

There Are “No-Brainers”

When it comes to business decisions, there are “no-brainers.” Our brains are always at work, sometimes without our conscious awareness, and sometimes in ways that hinder rather than help us.

At every stage of the decision-making process, there are usually misperceptions, faulty assumptions and other mind tricks which can influence the choices we make.

The highly complex and important decisions are the most likely to be distorted because they involve the most assumptions, depend on estimates and receive more input from myriad people.

There is the psychological trap, these are for the higher stakes, the greater the risk.

These traps can work in isolation or in tandem.

A dramatic first impression may anchor our thinking, causing us to selectively seek out confirming evidence to justify our initial inclination. We often make some hasty decision, and this decision establishes a new status quo.

And as the sunk costs accumulate, we become trapped, unable to find a propitious time to seek out a new, possibly better course.

The best protection is awareness. Forewarned is forearmed. If you cannot eradicate the distortions ingrained in the way your mind works, you can at least build tests and disciplines into your decision-making process that can uncover errors in thinking before they become errors in judgment.

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