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It Isn’t Risk-Taking That Affects Poor Decision as Much as Aversion to Losses

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It Isn't Risk-Taking That Affects Poor Decision as Much as Aversion to Losses

Many studies have shown that we are about twice as likely to avoid losses as pursue gains. For example, we will trade stocks with gains twice as fast as selling stocks with losses despite tax advantages for selling losses. Sports teams consistently take fewer three-point shots, steal fewer bases, and attempt fewer two-point conversions than the odds would dictate.

This phenomenon has also been well documented in organizations. Some of the most notable examples are Kodak refusing to recognize digital, Xerox basically abandoning Windows technology, and retailers failing to recognize the impact of the internet. Why do companies act this way in spite of the many cases in which change is both organizationally and financially justified?

One big reason is our aversion to losses. Thus, it isn’t risk-taking that affects poor decision as much as aversion to losses. In the three examples cited above, no one got fired for the poor decisions until the companies started to decline and affected workers were laid off. In contrast, missing a budget (positive plans) causes lots of people to get fired in short order. So, how do we correct this problem? A better way of objectively evaluating the risks and outcomes of decisions would be a great start. A few tools to aid this process are:

Goals and Needs: 

The simplest technique is to understand the needs and goals of your partners in a relationship. For example, are you willing to endure short-term losses to develop long-term gains? Similarly, how are much are you willing to invest in efforts like quality, customer service, and people to improve the chances of success?

Beware Of and Minimize Bias: 

The greatest detractor from effective decision-making (which can be intentional, random, hidden, or even unknown) is bias.

  • Probably the greatest source of bias is our own set beliefs, experience, and reliance on “We have always done it that way!” Thus we simply ignore information or facts that are different than our own.
  • A second is our information and perspective. For example, right-brain and left-brain people simply look at different things and look at them differently.
  • A third factor is incomplete or wrong information. The most glaring issue is that showing a relationship does not necessarily mean cause and effect. For example, if you flip heads five times in a row with a fair coin the probability is still 50 percent that you will flip tails the next time.
     

No Pain, No Gain: 

In general, I recommend more consideration of the process of decision-making. How good is our information, what are the consequences of mistakes, and how much risk can we afford? I frankly believe with the exception of issues like safety, we can afford more risk. We generally are overly concerned with the consequences of mistakes than the potential of risk. This approach is well stated by Sheryl Sandberg in her comment: ”What would you do if you weren’t afraid?”

Be More Open: 

Organizations need to be open to measurement and feedback. Observing, understanding, and sharing financials, operations reports, and sales reports are the first step. Simple research studies that social media can provide are tools to use regularly. A management style such as the “walk around” and asking simply, “How are you doing? Is there anything you need?” can be priceless. One of my favorite phrases is, “If you aren’t making mistakes you aren’t trying hard enough.”

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