How Our Personal Stake Can Cloud Judgment

How Our Personal Stake Can Cloud Judgment

If there is one factor that has defined the challenge leaders have faced in the last few unprecedented weeks and months, it must be uncertainty. In times like this, being able to change course and maintain our adaptability is absolutely vital, particularly as we seek to make critical business decisions. In this kind of environment, there is a cognitive bias that has particular potential to wreak havoc: sunk cost bias, also known as the sunk cost trap or escalation of commitment.

Sunk cost bias, the tendency to continue investing in a losing proposition because of what it’s already cost us, has been responsible for the failure of countless relationships, projects, and even businesses. If you’ve ever bid more than you planned on eBay, held onto a financial investment for too long, sat through a dreadful movie right to the end, eaten far too much in order to finish a meal you bought, or continued to wear an uncomfortable pair of shoes to “get your money’s worth”, you’ve most likely been caught by this mental trap.

The problem is caused by a (probably unconscious) desire to avoid losing the value of an earlier investment of some sort. As such, the sense of loss of the initial investment distorts our ability to properly evaluate the pros and cons of the current situation. There is no need to look any further than the collapse of Barings Bank, which was caused by the desire of a single trader, Nick Leeson, to recapture escalating losses, to see how devastating the impact of this kind of decision-making can be.

Many critical leadership activities involve a series of choices, rather than an isolated decision. They are vulnerable to sunk cost bias because each choice tends to be approached serially, creating a desire to justify previous investments. When this happens, we are highly susceptible to an escalation of our commitment to the original decision and, consequently, likely to become stuck on a failing course of action.

This may not sound complex, but in practice, it can be very difficult to avoid. The solution relies on developing the ability to remove the unconscious biases that lead us to treat initial costs as though they are relevant to new decisions. In reality, these costs are “sunk”, so the goal is to ensure that ongoing decisions consider only the future benefits weighed up against the additional costs, inconvenience, and time involved.

The key, as described in this article, is to implement a set of protective measures and to learn to let go of the past, without becoming overly risk averse. It provides six “rules” that can help, and I particularly like its final recommendation.

Read the Article: How Great Leaders Avoid the Sunk Cost Trap

My Advice

When commitment escalates inappropriately, what is really happening is that our judgment is getting clouded by our personal stake. This stake may be financial, or it could be associated with how we feel our reputation will be impacted by changing course. Either way, it is essential that we find a way to shift our focus of attention away from the previously selected, now irrelevant, course of action to give proper consideration to future costs and benefits. Some simple techniques that can help, in addition to those in the article, include:

  • Getting views of those who weren’t involved early on.
  • If you find that admitting an earlier mistake feels distressing, explore to try to identify what is at stake for you personally, and deal with any self-esteem and ego issues that arise.
  • Avoiding a culture of fear or blame which will tend to encourage staff to perpetuate mistakes.
  • Determining rewards by looking at the decision process rather than the outcome. This motivates people to make the best decisions at different stages, whether or not their initial decisions have been proven to be correct.
  • Constantly reassess the rationality of future commitments based on future costs and benefits, attempting to identify failures early. Take an “experimental” approach and be prepared to shift to another course of action at any time.
The Germ vs. The Terrain, Part 1: The Rise of Microbes

The Germ vs. The Terrain, Part 1: The Rise of Microbes

For the health and wellbeing section this time, I want to cover a subject which also has great relevance to leadership in general, because it looks at core aspects of the advancement in knowledge of all kinds. Due to the amount of information involved, I’ve split the article into two parts, the second of which will be in the next newsletter.

Consider this quote:

“From inhaling the odour of beef, the butcher’s wife obtains her obesity.”

~ Professor H Booth, writing in the Builder, July 1844

Because our thinking has moved on, it sounds ridiculous today. It is obvious that the medical theory on which this idea was based, the Miasma Theory, which held that inhaling bad air was the cause of most, if not all, illness, is complete rubbish. However, that wasn’t always the case, so I’d like to start by looking at how acceptance of this theory impacted the adoption of later, more advanced, ideas.

Imagine, for a moment, if you could go back and walk the streets of London in the mid-1800s. It would have been commonplace to see people carrying a posy of flowers under their noses – at that time, it was considered very sensible to do so, as a means of protecting one’s health!

Imagine using your more advanced knowledge to persuade these people that their flowers were useless, assuring them that you had seen research proving the existence of invisible organisms which are the true cause of disease… It’s easy to envisage the likely reaction, because we’ve all experienced it many times when we challenge others’ deeply held beliefs.

In 1848, Ignatz Semmelweis began this journey. He was the first person to propose the “Germ Theory” of disease, having had an insight that deadly illnesses that were especially prevalent in hospitals might be caused by invisible, infectious agents or germs which were being spread on the hands of doctors and nurses. He gathered evidential proof of his ideas by getting medical staff in his wards to wash their hands in chlorinated lime, showing that this reduced death rates significantly. Nevertheless, his suggestion was widely criticised, ridiculed, or ignored by the “experts” of the day:

  • Even ten years later, the editor of the Wiener Medizinische Wochenschrift, the international scientific medical journal, wrote that it was time to stop the nonsense about the chlorine hand wash.
  • In 1961, his book on the subject was negatively received, and his ideas were again rejected.

Under the pressure of the scrutiny he was subjected to, Semmelweis suffered a breakdown in 1865 and was tricked by colleagues to visit a mental hospital where they locked him up. He died somewhat suspiciously 2 weeks later, supposedly from an infection.

Germ Theory finally became widely accepted over 40 years later, in the 1890s, as a result of the work of the French chemist and microbiologist Louis Pasteur, the English surgeon Joseph Lister, and the German physician Robert Koch. They are now given much of the credit for development and acceptance of this theory, which still dominates today. It is sad to consider how many people died as a result of the refusal of the authorities at that time to take Semmelweis’ ideas seriously.

The commonplace nature of this kind of powerful resistance to new ideas was brilliantly exposed in a book written almost 60 years ago by Thomas Kuhn. Though few have heard of it, The Structure of Scientific Revolutions has sold around 1.5 million copies (a huge number for a book of this nature) and is still considered a classic today. It changed scientific thinking, revealing that progress generally occurs through incremental developments in knowledge, where everyone uses a common framework, interspersed with periods of revolution, or crisis, where paradigms break down and new models of understanding are created. It was in this book that the concept of the “paradigm shift” was birthed.

I’m fascinated by these ideas because, from the perspective of mental development, there is an enormous difference between working within a model to advance it incrementally and having the open-minded creativity to leapfrog to a higher-level model which more accurately represents behaviours in the physical world. Working within the model can be valuable, however, being able to break the mold completely is where the potential for a transformation in results becomes possible.

Ironically, even before germ theory had reached general acceptance, it was already being challenged. The alternative idea, known as “Terrain Theory” (or the cellular theory), stated that the environment is more important than the germ, meaning that the quality of the internal environment mainly determines a person’s susceptibility to disease, not the germs they encounter. It suggests that when the terrain is healthy, the body can handle pathogenic microorganisms without succumbing to illness.

Terrain Theory was put forward by a French scientist, Claude Bernard, and later built upon by Antoine Béchamp. Like Semmelweis before him, Béchamp was branded a heretic, and Pasteur argued with him for years on the subject. However, Pasteur famously changed his mind on his deathbed, acknowledging that, “Le microbe n’est rien, le terrain est tout.” (The microbe is nothing, the terrain is everything).

While germ theory won the debate at the time, and has formed the core of Western medical thinking, the evidence is building powerfully to suggest that Pasteur’s deathbed utterance was correct. As a result, it could be that a paradigm shift towards the terrain theory might, finally, be approaching.

In the next newsletter, I’ll explore terrain theory in more detail, to see how this shift of mindset and belief systems holds the potential to transform our understanding of how to be healthy.

Should you wish to do so, you can read more on Kuhn, and the core principles in his book, in this article:

Thomas Kuhn: the man who changed the way the world looked at science

“Because the Answers Have Changed”

“Because the Answers Have Changed”

The title of this section is probably one of Einstein’s less well-known quotes. Nevertheless, I believe it’s also one of the most powerful and important things he said, particularly because of the way it relates to our ability to learn, grow and handle change.

The story goes that, while administering a 2nd year exam at Princeton University, his teaching assistant noted that Einstein had set the same paper as the previous year. Dr. Einstein, he asked, “Isn’t this the same exam you gave this class last year?”

Einstein paused, then replied, “Yes, it is.”

Puzzled, the assistant enquired, “Why would you give the same exam two years in a row?”

“Because,” Einstein replied, “the answers have changed”.

This observation highlights a critically important concept: what we hold as “true” now can, and very often will, change. For leaders, there are two sides of this coin, one relating to maximising future potential, and the other to do with over-relying on the past:

  1. It is essential to be able to recognise new insights and discoveries as they emerge, because this awareness can open up new possibilities, creating the potential to gain a competitive advantage or improve results.
  2. Changes in the external environment can have the effect of making any current solution less effective, or even invalid, irrespective of its usefulness in the past. Strategies, systems and processes that were once “best practice” can become past practice virtually overnight, and this is happening right now, at a rate that has never been seen before.

Most people have already become fairly well aware of this challenge. However, understanding the need to remain alert in order to spot changes as they occur is the easy part. Being able to put that awareness into practice is a completely different matter, because of the way our unconscious mind prefers the familiarity of the known. This can create a feeling that we “know”, or are “right”, even when our certainty has no basis in reality whatsoever.

Unfortunately, we get no mental or emotional “warning bell” as we pass the point where ‘knowing” turns from strength to weakness: when we are wrong, but feel certain we are right, the way we feel matches the belief, not the fact. This article provides six recommendations, with details as to why each can be of great help to overcome our tendency to over-rely on expertise and/or knowledge, these being:

  1. Maximise learning by listening attentively and reading critically.
  2. Cultivate diverse sources of trusted advice who are willing to disagree with you.
  3. Avoid your experience becoming too narrow.
  4. Seek to overcome biases by actively looking for differing perspectives (stay detached).
  5. Keep questioning when options are offered.
  6. Think carefully about the risks during delivery/implementation.

Read the Article: The Elements of Good Judgment

My Advice

To respond more effectively to changes in the business environment, it is essential to remember that even practices that worked very well in the past may not get you to where you want to go tomorrow. The most powerful approach for overcoming the ‘knowing/being right’ trap is also the core principle of scientific thinking: take what you believe and actively seek to disprove it, especially if you feel certain! Doing so will help to protect you against out-dated assumptions and be hugely transformation to your decision-making.

As the Einstein example highlights, to stay in front it is essential to keep questioning your beliefs, because you never know when the answer will change!