Over the past 10 years in business I have know many very smart business owners (plus some that are not). What puzzles me about some of these smart ones (myself included) is that with all of their experience and business acumen, how they still sometimes make dumb decisions. So, Why do smart business owners make dumb decisions?
When I went looking for the answers I was surprised with how many potential ‘issues’ there were. Infact I found myself being guilty of quite a few! Here are a couple that stood out.
1) The 'fundamental attribution error'
This bias makes us attribute the failure of others to character and our own failures to circumstance. “Bob’s business went broke because he was incompetent; mine went broke because of the recession.” It also attributes our own successes to our competence, discounting luck, while seeing others’ successes as products of mere luck.
This lands you in hot water when you assume that bad stuff only happens to other people: you’re not going to be part of the 50 percent of people who get divorced, and the price of your house will go up etc
2) The 'confirmation' bias
We tend to like and surround ourselves with people who think like us. If we agree with someone’s beliefs, we’re more likely to be friends with them. While this makes sense, it means that we subconsciously begin to ignore or dismiss anything that threatens our world-views, since we surround ourselves with people and information that confirm what we already think.
3) The 'over-confidence' bias
This is also known as the ‘my guess is better than yours’ bias. People’s confidence in their own decisions tends to outstrip the accuracy of those decisions.
4) The 'availability' bias
We tend to estimate what’s more likely by how easily we can come up with an example from memory. The availability of our memories is biased toward vivid, unusual, or emotionally charged examples. So we tend to make those more salient, then come up with weird decisions based on them.
5) The 'sunk cost' fallacy
The term “sunk cost” refers to any cost (not just monetary costs but those in terms of time and effort) that has been paid already and cannot be recovered — so, basically, a payment of time or money that’s gone forever.
In economics, a sunk cost is any past cost that has already been paid and cannot be recovered. For example, a business may have invested a million dollars into new hardware. This money is now gone and cannot be recovered, so it shouldn’t figure into the business’s decision making process.
This is a big one in businesses, jobs and relationships. You can be stuck in a crappy situation for a while, and then think, “But I’ve invested three years in this! I can’t just throw that away!” The fact is that those three years are never coming back – you’ve already thrown them away, so don’t worry about it! The sooner you cut bait and go for a better situation, the better off you are.
6) We incorrectly 'predict the odds'
Imagine you’re playing Heads or Tails with a friend. You flip a coin, over and over, each time guessing whether it will turn up heads or tails. You have a 50/50 chance of being right each time.
Now suppose you’ve flipped the coin five times already and it’s turned up heads every time. Surely, surely, the next one will be tails, right? The chances of it being tails must be higher now, right? Well, no. The chances of tails turning up are 50/50, every time, even if you turned up heads the last 20 times. The odds don’t change.
The gambler’s fallacy is a problem with our thinking. The problem occurs when we place too much weight on past events and confuse our memories with how the world actually works, believing that they will have an effect on future outcomes (or, in the case of Heads or Tails, any weight, since past events make absolutely no difference to the odds).