Why You May Be Making Wrong Decisions

A leader is judged by the quality of decisions he makes. Who to hire, who to dismiss or what to invest in are all common decisions a leader needs to
01 Sep 2018 10:00
Why You May Be Making Wrong Decisions

A leader is judged by the quality of decisions he makes.

Who to hire, who to dismiss or what to invest in are all common decisions a leader needs to make all of which have the potential to have long term consequences on the future of the business.

We have all made good decisions and bad decisions but if you want a successful career as a leader then the majority of decisions you make need to be good ones.

In this article I will explore the number one reason why bad decisions are made.


The Sunk Cost Fallacy

When I deliver leadership workshops for Senior Managers I explain the psychological trap called “the sunk cost fallacy.”

This is when a person places a value on something based on the level of emotional investment rather than the actual cost.

This explains why people are more likely to continue with an endeavour, stick with a decision or stay in a relationship longer than they should.

They believe the investment will eventually pay off which is a fallacy, it’s simply not true.

The emotional connection makes the decision, product or relationship more valuable than it actually is.

Let me give you an practical example.

This is an experiment you can try in your office. Take a cup, just a simple cup and show it to everyone. Explain that the purpose of the experiment is to determine the value of the cup.

Next, split the team into two groups, one group who wants to purchase the cup for a price  are willing to pay.

The second group already owns the cup and have to pice up the cup and determine how much they would seek the cup for.

Typically what happens is that the group who already owns the cup values it 10-20% more than the group who wants to buy the cup.

It’s the simple act of ownership that creates an emotional connection which increases the perception of value.

Now what does this mean for leaders in business?


The story of Concorde

In business when leaders fall into this trap, they end up continuing to invest in an idea whether the investment involves time or money and go way beyond what is appropriate.

They lose objectivity of when to quit.  The most famous example of this in business is the story of Concorde.

The Concorde was a supersonic passenger airliner that was a joint project between the British and French governments between 1973 and 2003.

This project lost money for over forty years yet both governments continued to invest in the project even when it was obviously a commercial disaster.

In hindsight the Concorde project shouldn’t have started in the first place or at least should have been cancelled early on but because of the level of commitment shown by the governments over the years they didn’t feel they could back out. They convinced themselves that if they invested more it would pay off in the long term.

This was a fallacy.

The more they invested the more they had an emotional connection and the more they valued their decision even though it was a wrong decision.

This is the danger of the sunk cost fallacy.

I’ve seen first hand when I’ve working with companies the dangers of falling into the psychological trap of a sunk cost fallacy.

I’ve worked with some very smart people who end up making very stupid decisions just like the British and French governments with Concorde they end up getting trapped by their previous level of commitment, they don’t want to look bad so they continue to push through with a bad decision they shouldn’t have made at the beginning.

Decisions like this can cost a company thousands or even millions of dollars and can derail careers however there is a solution.


Day one thinking

Let me share with you the best piece of advice I have ever received.

It was from my general manager back when I was a Broker Sales Manager and he got it from his boss. I was told that if I ever had any concerns over a decision I should remember day one, which is what decision would I make if today if  I was starting everything from the beginning and if today was day one.

This gives you a different perception and challenges your thinking which hopefully helps you make better decisions.

Netflix, the giant streaming service and one of the world’s most successful companies have a similar policy when evaluating their staff.

When it comes to performance reviews, every Manager has to answer a simple question about each of their team and that question is if this person left today would they fight to keep them and if so what would they pay them in order to retain their services.

Too often leaders accept poor performing or just average performing employees because of their length of service when they would never hire that same person if they applied for a job today.

Leadership is difficult and there are many traps for a leader to fall into.

The sunk cost fallacy is just one of them. It  can cause leaders, companies and even governments to make poor decisions. So ask yourself what would you do if today was day one and hopefully you will make the kind of decisions that will deliver a bright future to you and your company.




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