There are many reasons why intelligent, reasonable people make bad decisions. One of those reasons is that a decision may be more the result of unconscious, mental short cuts, not rational, objective facts and evidence. A recent article in Entrepreneur magazine discusses some of the downsides of how we make decisions.
Why Do Smart People Make Bad Decisions?
- Survivorship bias
Articles you see in the media (including this one) contain lists; many of them spell out the supposed recipe for success used by one person or another. These articles are examples of survivorship bias.
Survivorship bias is our tendency to focus on the winners in a particular field and try to copy their success while ignoring the fact many people using the same strategies fail. When we only hear about those who excel in the dog-eat-dog world of business we overvalue their strategies and approaches. There are some billionaire college drop outs but leaving college early without a degree but deep in debt probably isn’t a recipe for success.
- Loss aversion
We strongly prefer to avoid losses over acquiring gains. Our desire to avoid losses causes us to make decisions or change behavior to retain things we already have. We are protective of what we own so we overvalue them. Why do we hold onto things like clothing or shoes we never wear but we can’t bear to donate them to someone needier who will actually use them? It’s that feeling of loss.
- The availability heuristic
This is a common mistake we make by assuming the examples which quickly come to mind are the most important or relevant things to consider. Statistically, overall, we’re living in one of the least violent times in history, according to research by Steven Pinker at Harvard University. But with the ever present, always available media reporting news of violence all the time we can’t believe it because we just read a story or saw a video about some civil war somewhere or a mass murder.
If the price of a watch is $500 you would probably think that’s too much. But if before learning of that watch you see another that costs $5,000 that $500 watch seems more reasonable because that $500 price is “anchored” to the much higher $5,000 cost. Many manufacturers don’t sell many of their top of the line models but their higher prices make it easier for us to justify paying for lower priced (though still possibly overpriced) models.
- Confirmation bias
Confirmation bias is our tendency to search for and favor information that confirms our beliefs while ignoring or devaluing information that contradicts them. Changing your mind is difficult and the stronger your belief the more you filter out and ignore evidence contradicting your position.
These mental short cuts and tendencies can impact negotiations.
- If a client recently read about a similar case that resulted in a plaintiff receiving a large reward, it could bias both sides. He or she might believe the case is worth more than it actually is.
- It may be easier to convince a client to accept an offer if it’s framed as a way to prevent loss: “If you don’t accept the offer and we go to trial you may lose what’s on the table now or the plaintiff may win, be awarded a far greater amount so you should cut your losses now by agreeing to the demand.
- If a client is convinced they are right and a certain amount of money is all they’re willing to offer or accept, you may be wasting your breath when you tell your client your opinion of the applicable law or the value of the case.
So why do smart people make bad decisions? They do so, because our brains are wonderful, flawed things. The better we understand how it works the better we can recognize and overcome those flaws to make more rational decisions.
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