However, 2020 has cast a great web of uncertainty across businesses, the industry and the world. Initial impressions, estimates or data anchor subsequent thoughts and judgments. So, for example, imagine that you are buying a new car. You will assign a higher probability to traffic accidents if you have passed one on the way to work, and you will assign a higher chance of someday dying of cancer yourself if a close friend has died of the disease. Do so only when it … To aid in this navigation, we would do well to consider three helpful anchors: operating at the edge of chaos, learning to ask questions and listen to the answers, and deflating our egos. These rules of thumb serve us reasonably well, allowing us to make decisions quickly, so that we can efficiently carry out the tasks that are demanded of us. Is the population of Turkey greater than 35 million? The bank finally solved the problem by instituting a policy requiring that a loan be immediately reassigned to another banker as soon as any problem arose. Anchoring and Ordering An anchor is a thing that serves as a reference point for our comparisons. In half the cases, we used 35 million in the first question; in the other half, we used 100 million. Anchors take many guises. For executives, whose success hinges on the many day-to-day decisions they make or approve, the psychological traps are especially dangerous. In t his scenario, due to anchoring bias, ... An example from Claude Hopkins. For airline pilots, though, the distortion can be catastrophic. Otherwise, it’s just throwing good money after bad. It’s also the toughest and the riskiest. Try not to be guided by impressions. One of us helped a major U.S. bank recover after it made many bad loans to foreign businesses. Force yourself to choose. What exactly is anchoring in negotiation, and how does it play out at the bargaining table?. Even though most of us are not very good at making estimates, we tend to be overconfident about our accuracy—which can lead to bad decisions. Remember the wise words of Warren Buffet: “When you find yourself in a hole, the best thing you can do is stop digging.”. Better yet, build the counterarguments yourself. When faced with high-stakes decisions, we tend to adjust our estimates or forecasts “just to be on the safe side.” Many years ago, for example, one of the Big Three U.S. automakers was deciding how many of a new-model car to produce in anticipation of its busiest sales season. The original question surrounding the decision you are trying to make has already created an anchor. Learn more in CFI’s Behavioral Finance Course. For all decisions with a history, you will need to make a conscious effort to set aside any sunk costs—whether psychological or economic—that will muddy your thinking about the choice at hand. For a 4 bedroom, 5000 square foot home this may be a reasonable list price, but in the case of a one bedroom 1000 square foot house located in the country, this price point is absurd. The Anchoring Trap: Over-Relying on First Thoughts. Mediation; Investigations; Conflict Coaching ... Anchoring in Negotiations. Be careful to avoid anchoring your advisers, consultants, and others from whom you solicit information and counsel. In this article, first published in 1998, John Hammond, Ralph Keeney, and Howard Raiffa examine eight psychological traps that can affect the way we make business decisions. Check whether you’re examining all evidence with equal rigor. They can be as insidious as a stereotype about a person’s skin color, accent, or dress. Their book, Smart Choices: A Practical Guide to Making Better Decisions, is published by the Harvard Business School Press. The second strongest reason? But “later” is usually never. As a Water Commissioner, one has to choose among various probable water allocations between the farmers and residents, during a water shortage. While no one can rid his or her mind of these ingrained flaws, anyone can follow the lead of airline pilots and learn to understand the traps and compensate for them. A frame can establish the status quo or introduce an anchor. If the business does have a good chance of coming back, that’s a wise investment. These routines, known as heuristics, serve us well in most situations. Pears targeted the problems of wrinkles if the consumer … It seems psychologically safer to let him or her stay on, even though that choice only compounds the error. and how they impact both your cash management and your business as a whole: The Anchoring Trap: When making a decision, our minds often give preference to the first information they receive. The consultants could have been much more aggressive and creative in their counterproposal—reducing the initial price to the low end of market rates, adjusting rates biennially rather than annually, putting a cap on the increases, defining different terms for extending the lease, and so forth—but their thinking was guided by the owners’ initial proposal. In fact, ... Let’s take a look at some everyday anchoring bias examples that may impact your decisions. A dramatic or traumatic event in your own life can also distort your thinking. Negotiations. She presents a strong case that other currencies are about to weaken significantly against the dollar. The framing trap occurs when we misstate a problem, undermining the entire decision-making process. Consider the experience of a large consulting firm that was searching for new office space in San Francisco. A marketer attempting to project the sales of a product for the coming year often begins by looking at the sales volumes for past years. Initial impressions, estimates or data anchor subsequent thoughts or judgments. Seek information and opinions from a variety of people to widen your frame of reference and to push your mind in fresh directions. The framing trap can take many forms, and as the insurance example shows, it is often closely related to other psychological traps. Without fail, the answers to the second question increase by many millions when the larger figure is used in the first que… Once you become aware of the status-quo trap, you can use these techniques to lessen its pull: Another of our deep-seated biases is to make choices in a way that justifies past choices, even when the past choices no longer seem valid. In this final installment of our series on decision making, we’ll reflect on practical suggestions for improving our effectiveness in decision making. The relativity trap is … To mitigate the effect of anchoring, it would be prudent to view a problem from different perspectives – alternative starting points. But the fact is, we all carry biases, and those biases influence the choices we make. By, for example, opening the negotiation on a rental contract by stipulating the terms of such a contract, they succeed in defining the mental parameters within which the potential tenant operates. Avoid exaggerating the effort or cost involved in switching from the status quo. Favoring alternatives that perpetuate the existing situation Example: A key merger stumbles because the acquiring company avoids imposing a new management structure on the acquired company. Harvard Business Publishing is an affiliate of Harvard Business School. The same problem can also elicit very different responses when frames use different reference points. Position yourself to excel in your career by attending one of our professional development workshops. Don’t cultivate a failure-fearing culture that leads employees to perpetuate their mistakes. The status quo trap biases us toward maintaining the current situation–even when better alternatives exist. In the words of Hammond, Keeney and Raiffa, “The anchoring trap leads us to give a disproportionate weight to the first information we receive.” According to Widmar, anchors come in all forms. There are two fundamental psychological forces at work here. Consider the position with an open mind. That’s why pilots are trained to use objective measures of distance in addition to their vision. In fact, research from Harvard … Sticking with the status quo represents, in most cases, the safer course because it puts us at less psychological risk. Psychological traps are easy to fall for when it comes to making business (or any) decisions, says Nicole Widmar, associate professor of agricultural economics at Purdue University. Where do bad decisions come from? Furthermore, they tend to adopt the frame as it is presented to them rather than restating the problem in their own way. These are just a few examples of psychological traps that decision makers fall into in the business world. In this final article in the Data-Driven Decision Making in Times of Crisis series, we explore the last stage in the journey to transform data into actionable intelligence, also known as the intelligence cycle. Ask a respected colleague to argue your potential decision. The strikingly different responses reveal that people are risk averse when a problem is posed in terms of gains (barges saved) but risk seeking when a problem is posed in terms of avoiding losses (barges lost). An extreme example is the methodology of “worst-case analysis,” which was once popular in the design of weapons systems and is still used in certain engineering and regulatory settings. “Maybe I’ll rethink it later,” they say. For example: Think hard throughout your decision-making process about the framing of the problem. Anchors influence the decisions not only of managers, but also of accountants and engineers, bankers and lawyers, consultants and stock analysts. “Let’s not rock the boat right now,” the typical reasoning goes. No one can avoid their influence; they’re just too widespread. Get someone you respect to play devil’s advocate, to argue against the decision you’re contemplating. A dramatic first impression might anchor our thinking, and then we might selectively seek out confirming evidence to justify our initial inclination. In business, this means that we’re likely to hold onto initial reports, evidence or sound bites, anchoring … On a more familiar level, you may have succumbed to this bias in your personal financial decisions. It’s also one of the most dangerous steps. Sunk Cost Trap. Our brains are always at work, sometimes, unfortunately, in ways that hinder rather than help us. A dramatic or traumatic event in your own life can also distort your thinking. In a discussion at a board meeting, if the first speaker has a strong opinion, they can sway the whole tone of the debate, focusing not on what is right, but on the extent to which the first speaker is right. But heuristics can be highly fallible. These might seem like silly little experiments that psychologists do to try and suggest that people are idiots, but actually it’s showing us something fundamental about the way we think. Here are a few examples: The anchoring trap is an easy one to fall for. Subjects were asked whether the percentage of U.N. membership accounted for by Afri… A well-known cognitive bias in negotiation and in other contexts, the anchoring bias describes the common tendency to give too much weight to the first number put forth in a discussion and then inadequately adjust from that starting point, or the “anchor.” We even fixate on anchors when we know they are irrelevant to the discussion at hand. This trap is the tendency to rely too heavily on the first … They’re also susceptible to overconfidence. Ralph L. Keeney is a professor at the Marshall School of Business and the School of Engineering at the University of Southern California in Los Angeles. The way the human brain works can sabotage the choices we make. Our past decisions become what economists term sunk costs—old investments of time or money that are now irrecoverable. Having been trapped by an escalation of commitment, they had tried, consciously or unconsciously, to protect their earlier, flawed decisions. The higher the stakes, the higher the risk of being caught in a psychological trap. It's a negotiation trap that can.. John Curtis - Kingston, Ontario. Overly confident about the accuracy of their predictions, most people set too narrow a range of possibilities. If the problem lies in your own wounded self-esteem, deal with it head-on. Decision makers display, for example, a strong bias toward alternatives that perpetuate the status quo. Test estimates over a reasonable range to assess their impact. The way the human brain works can sabotage our decisions. “When you seek input, avoid sharing your ideas first so the person giving the advice doesn’t fall into the anchoring trap.”, The framing trap happens when options are presented in ways that can change perspective.“Never look at a problem from only its original frame,” Widmar says. For each of the three traps, some additional precautions can be taken: When it comes to business decisions, there’s rarely such a thing as a no-brainer. The sunk-cost bias shows up with disturbing regularity in banking, where it can have particularly dire consequences. The status-quo trap biases us toward maintaining the current situation--even when better alternatives exist. Bad decisions can often be traced back to the way the decisions were made–the alternatives were not clearly defined, the right information was not collected, the costs and benefits were not accurately weighed. Over the years, we’ve posed those questions to many groups of people. Though we can’t get rid of them, we can learn to be alert to them and compensate for them—monitoring our decision making so that our thinking traps don’t cause judgment disasters. TIP- Ask the people involved to think about the issue individually before inviting discussion as a group to avoid anchoring on the first idea presented. But before you put the brakes on the plant expansion, you decide to call up an acquaintance, the chief executive of a similar company that recently mothballed a new factory, to check her reasoning. You read online that the average price of the vehicle you are interested in is $27,000 dollars. While your answers to both questions should, rationally speaking, be the same, studies have shown that many people would refuse the fifty-fifty chance in the first question but accept it in the second. Anchoring trap. Be on the lookout for the influence of sunk-cost biases in the decisions and recommendations made by your subordinates. If youre like most people, the figure of 35 million cited in the first question (a figure we chose arbitrarily) influenced your answer to the second question. That can lead to errors in judgment and, in turn, bad decisions.

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