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.
“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!

Leading When Uncertainty is Pervasive

Leading When Uncertainty is Pervasive

That leadership is about dealing with change – handling difficulties as they arise and adjusting course when necessary – is not news, or new. It involves diagnosis, then action, and it involves a great deal of resilience.

The problem is, the nature of decisions, even the approach needed to make them, varies hugely depending on the level of complexity and uncertainty in the environment. The more volatile and ambiguous the circumstances we face, the greater the difficulty of diagnosis becomes. As this happens, decision-making becomes less science and more art.

This is a real challenge, right now. If there is a simple way to describe the operating environment of the last few months, it is the absence of predictability and increase in ambiguity. Complexity has been spiralling out of control, and this has fundamental implications for leaders, many of whom have leaned heavily on their market, technology or industry expertise in reaching their level of seniority. The problem is, as uncertainty increases, so does the risk that expertise will become more of a hindrance rather a help.

“I know that I am intelligent because I know that I know nothing.” ~ Socrates

The most compelling warning that I’m aware of, which highlights the dangers of over-reliance on expertise and being blinkered by certainty our knowledge is correct, comes from the largest study to date on this subject, completed by Professor Philip Tetlock of the University of Pennsylvania. Over 20 years, and involving 82,361 forecasts by a large group of experts, he investigated their thought processes as they made predictions about future events, then he followed up to assess their accuracy.

This piece of work has become quite famous, perhaps because the high-level conclusion that Tetlock drew from it is rather memorable: that the average expert “is not much better at predicting the future than a dart-throwing chimpanzee”. Many of them, he found, would have done better if they had made random guesses!

I believe this should strike a note of caution for all of us…

What makes this study extremely important, is that Tetlock was able to identify a small group of experts who consistently defied the odds. They made startlingly better predictions than everyone else, even in the face of massive uncertainty.

What differentiated this group was their thinking style: they were comfortable with complexity and uncertainty and did not allow themselves to become overconfident. This allowed them to constantly seek new perspectives and to avoid getting locked into the rigid mindset of what they already “knew”.

This article suggests that responding to the pervasive and unprecedented uncertainty that we all face today requires a whole new style of leadership: one built on humility, openness and commitment. I like this suggestion, not least because strengthening these traits does much to overcome the problems associated with over-reliance on expertise outlined above.

Read the Article: Leading in Uncertain Times: Be Real – Not a Hero

My Advice:

Remember, one thing that history demonstrates conclusively is that almost everything, even the most widely accepted scientific “facts”, will be disproven eventually. Unfortunately, we naturally tend to resist the idea that we might be wrong, because falling back on our expertise is comfortable and almost effortless. On the other hand, learning requires commitment and can be very uncomfortable. That’s where resilience comes in. We must learn to welcome the discomfort inherent in facing new challenges to maximise our ability to cope with highly complex and ambiguous situations. By practicing humility and openness, which will help you to see things from a new perspective, while displaying confidence and commitment, you will dramatically improve your resilience, thereby transforming your ability to adapt effectively.