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 “Better than Average” Trap

The “Better than Average” Trap

There are two areas of understanding involved in our sense of self-awareness:

  • Who we believe that we are  our identity, including our values, fears, thoughts, feelings, behaviours, strengths and weaknesses, drivers and motivators.
  • How we fit into the world around us – based our beliefs about how the world works.

The problem is, we aren’t typically very good at making these assessments. Worse, as human beings, we have a tendency to overestimate ourselves, especially in relation to others.

For example, in one of a series of experiments by researchers at Cornell University, students were asked to predict how many flowers they would buy in an upcoming charity event, and how many the average student would buy. They then compared the predictions with actual behaviour. Consistently, the students greatly overestimated their own contributions, while making good guesses about what others would do.

This trait is known as illusory superiority, and it leads directly to problems like over-confidence, poor critical thinking, and a weakened ability to learn.

To compound the problem, even being given feedback on actual outcomes doesn’t lead us to make accurate adjustments. People have no resistance to adjusting down their estimates relating to others, but don’t similarly revise their perception of self, preferring to maintain their inflated self-image. The result is that, while we evaluate everyone else on observable behaviours, we cling to our original assessment of ourselves, even in the face of evidence to the contrary. For us, our knowledge of what we are “really like inside” is preferable emotionally, and therefore outweighs the external evidence.

The evidence of illusory superiority has been found in many studies, for example:

  • High school students evaluate their leadership ability as above average 70% of the time, while only 2% of them see themselves as below average.
  • When MBA students were asked to estimate their contribution to a team effort, the overall total came to 139%.
  • 94% of university professors rate themselves as above average.
  • In one company, 32% of the employees saw their performance as being in the top 5%.

Leaders are especially susceptible to the tendency to overestimate their skills and contribution, because the delusion affects people most when the traits required are ill-defined – which is definitely true of leadership! That enables us to set up comparisons in a way that favours us.

This comprehensive article examines the power of reflective capacity, or mindfulness, to increase self-awareness because of the way it improves our ability to observe ourselves objectively. It examines the importance of giving consideration to our “inner self”, which is separate to our thoughts, looks at some of the benefits of self-awareness, and offers some simple practices for improving it.

Read the Article: What is Self-Awareness and Why is it Important?

My Advice

A powerful way to reduce our sense of illusory superiority is to become completely intolerant of our own excuses for our shortcomings, especially those which are based on the idea that poor results were “outside our control”. I call this desire to take personal responsibility, “getting to cause”, rather being “at effect”. Then, taking advantage of the fact that we are generally pretty accurate in assessing other people, seek third party input any time you find yourself making excuses, and make sure that you give full consideration to their responses. It won’t be comfortable, but you will increase the speed of your learning and immediately improve your decision making.