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October 11th, 2016

The External Factors Influencing Your Decisions

 

We make an incredible amount of decisions every day. From small decisions about what to wear, to large decisions that affect our futures – both personally and professionally.

In our decision making we are influenced by an incredible amount of external factors. Sometimes this is a good thing because it gives us the information needed to make an educated decision. Other times it can confuse and get in the way of accurate assessments.

An entire blog post could be dedicated to the argument that cluttering up your mind with a million small, insignificant decisions makes it more difficult to focus on large important ones. With the classic example of Barak Obama and Mark Zuckerberg eliminating the decision of what to wear so they are better able to concentrate on the large important decisions regarding politics and their business. This post however, is going to touch on everything that influences your decision making, whether they are menial or significant.

 

Decision Making in Business

In business, there has traditionally been an implicit standard answer on how to make decisions, which is that within the guidelines of the law, the choice that maximizes profits or shareholder value is the best choice. However, this is not so black and white anymore, and a grey area has been created by an increasing awareness of ethics. How your employees, the community, and the environment are effected by the decision you are about to make are also facets that need to be seriously considered.

This progression to a more ethically-based way of looking at business could be argued to be a throwback to the more historical, humanist perspective of the religious and philosophical traditions found around the world, where they typically discouraged preoccupation with wealth and power. Rather than managers having a single duty to the organizations profits, there is now a duty to the organizations overall well-being, which includes those working for it finding meaning in what they do, the impact on the community it does business in, and the health of the environment that it and its products may effect. The bottom line is still of course important, but how you achieve that goal is now more of a consideration.

 

What Affects our Decisions?

In general, humans are unreliable decision makers, and our judgements are heavily influenced by external factors that we are usually not even aware of. Our current mood, how hungry we are, and the weather are classic examples. There are some jobs that are regulated to the point that these factors do not affect the outcome as much. Jobs such as a bank clerk, or a factory line worker perform complex tasks, but they must follow strict rules that limit subjective choices that could alter the outcome of their work. While professions such as emergency room doctors, project managers, judges, and executives all make weighty decisions that are based on their own judgements of the immediate situation.

Bias

The different types of biases that we face and how they effect our decision making skills has been discussed at length in a previous Viewpoint blogpost so I won’t go into detail here. However it is important to mention them again because they make such a significant impression on our perceptions of ourselves, those we work with, and on the subsequent decisions and judgements that we make.

Noise

The influencers mentioned above such as mood and weather, that are seemingly arbitrary in when and how hard they strike, are described in an HBR article as “noise,” and are different from the classic, more well-known biases because the effect of noise on the outcome of decisions is typically different each time, whereas a bias usually gives the same or similar outcomes each time. The analogy that was used in the article was a bathroom scale,

“A scale that consistently underestimates true weight by exactly four pounds is seriously biased but free of noise. A scale that gives two different readings when you step on it twice is noisy.”

Noise is an issue in decision making because it goes unnoticed. Even professionals who have decades of experience tend to have a skewed perception of the accuracy of their own judgement, and fail to take into account whether the unusually bad traffic jam that morning is impacting their decision to cancel a deal with a new client.

Emotion

Emotion is definitely a part of the discussion on noise, but deserves its own section. It has such an impact on our decision making skills that an article in The Atlantic argues that emotions should be actively left out of the equation entirely. The article states that,

“…where fear breeds uncertainty, anger instills confidence. Angry people are more likely to put the blame on individuals, rather than “society” or fate. Anger makes people more likely to take risks and to minimize how dangerous those risks will be… angry people rely on stereotypes and are more eager to act.”

Even the way we perceive a situation has an effect. For instance how stressful a situation is thought to be has an impact on how ethically it is handled. The same stressful event that is experienced by two leaders of equal experience and knowledge can be dealt with quite differently. As noted by Selart and Johansen in their paper for the Journal of Business Ethics points out,

“Perceived stressful situations lead the decision makers to act more unethically… research indicating a clear link between leaders’ stress tolerance and their ability to operate effectively… With the help of high stress tolerance, leaders are capable to adapt to the hectic environments, long hours, and constant demands of the organization.”

Unfortunately there doesn’t seem to be any mood that provides an ideal frame of mind for making decisions. Positive emotions such as happiness and excitement are just as distracting and equally as disruptive. To combat them, just like with biases, you have to accept that you’re going to have emotions, and try to be aware of them so you can step back and analyze how they may be influencing your thought processes and actions.

However, to make it even more confusing, there does come a point where being 100% logical doesn’t make sense, and emotions are useful in adding a “human” element to the equation.

 

Decision Models vs. Gut Instinct

The two extremes in decision making go from being strictly logical in the assessment of the situation, to following your intuition on what you feel is the correct decision to make.

Models use algorithms to process vast amounts of data for the most relevant information, and are also immune to the biases that undermine our own human judgements. Because of this, they work incredibly well for decisions that are objective. Yet this can take time, which is not always a luxury that can be afforded.

Gut instinct on the other hand, is all about instantaneous subjective choices that work well when you are an expert on the situation. Being afraid to make a decision that isn’t perfect can lead to no decision, which leads to inaction, which is much worse.

The crucial take-away from the literature on this topic is that having the knowledge and understanding of when to use each form of decision making, and how to use them together when necessary is the idea combination. Writing for McKinsey & Company, Rosenzweig states,

“Big data and models help overcome biases that cloud judgement, but many executive decisions also require bold action inspired by self-confidence…when organizations embrace decision models, they sometimes overlook the need to use them well.”

 

Quality Tops Quantity

When making all of the hundreds of decisions that we do each day, we don’t need more information, we need the right information. As Baker says in his blogpost,

“Spend less time trying to amass all the information and more time better defining the problem so you can find the right information.”

Along related lines is the topic of information asymmetry, which was discussed in a previous Viewpoint blogpost. It looked at how executives and board members need to share their respective knowledge – on the company and from their own education and experience – to make the best decisions for the company’s future.

Decision making is crucial for a firm’s strategy in corporate social responsibility, organizational health, and the bottom line. With the environment, trust, and ethics moving more to the forefront of stakeholders concerns, making the best decision is no longer based solely on monetary gains. Ensuring the company and its product are sustainable in all three key areas is now essential.

Understanding that how you make your decisions, and knowing that emotions, bias, and other external noise influence your decisions, as well as being able to read the situation and determine whether you should listen to your gut, or to stake a step back and assess the situation more objectively, seems to be the deciding factor in whether the decisions that you make are successful or not.

 

 

 

Sources used for this post:

Badaracco, J. (2016). The “Maximize Profits” Trap in Decision Making. Harvard Business Review. Retrieved 20 September 2016, from https://hbr.org/2016/09/the-maximize-profits-trap-in-decision-making?referral=00210&cm_mmc=email-_-newsletter-_-strategy-_-strategy_date&utm_source=newsletter_strategy&utm_medium=email&utm_campaign=strategy_date

Barker, E. (2016). This Is How To Make Good Decisions: 4 Secrets Backed By Research. Barking Up The Wrong Tree. Retrieved 20 September 2016, from http://www.bakadesuyo.com/2016/06/how-to-make-good-decisions/

Boston College. (2016, July 28). Compromise nearly guaranteed when a woman is involved in decision-making pairs: Study finds when making joint decisions, men need to prove masculinity, 'push away' from compromise. ScienceDaily. Retrieved September 28, 2016 from www.sciencedaily.com/releases/2016/07/160728195604.htm

Eisenhardt, K. M., & Zbaracki, M. J. (1992). Strategic decision making. Strategic management journal13(S2), 17-37.

Kahneman, D., Rosenfield, A., Gandhi, L., & Baker, T. (2016). Noise: How to Overcome the High, Hidden Cost of Inconsistent Decision Making. Harvard Business Review. Retrieved 26 September 2016, from https://hbr.org/2016/10/noise?referral=00205&cm_mmc=email-_-newsletter-_-bestofissue-_-bestofissue_date&utm_source=newsletter_bestofissue&utm_medium=email&utm_campaign=bestofissue_date

Khazan, O. (2016). Why You Shouldn't 'Go With Your Gut'. The Atlantic. Retrieved 19 September 2016, from http://www.theatlantic.com/science/archive/2016/09/the-best-headspace-for-making-decisions/500423/

Lovallo, D. & Kahneman, D. (2003). Delusions of Success: How Optimism Undermines Executives’ Decisions. Harvard Business Review. Retrieved 21 September 2016, from https://hbr.org/2003/07/delusions-of-success-how-optimism-undermines-executives-decisions

Rosenzweig, P. (2014). The benefits--and limits--of decision models. McKinsey & Company. Retrieved 19 September 2016, from http://www.mckinsey.com/business-functions/strategy-and-corporate-finance/our-insights/the-benefits-and-limits-of-decision-models

Selart, M., & Johansen, S. T. (2011). Ethical decision making in organizations: The role of leadership stress. Journal of Business Ethics, 99(2), 129-143.