In our last post , we looked at three types of decision traps that could seriously affect our leadership. Here are four more traps to be aware of.
Too good to be true
Invest here and you will earn a million dollars! Trade in your old PC and get a brand-new PC for free! Take this course and a seat at Harvard is guaranteed!
These fall in the category of claims that are too good to be true. Unfortunately, many of us fall into this trap. Because we want the positive outcome so badly, we ignore the yellow-flag and go right in. Later we end up regretting a bad decision. Whenever we see someone offering us a disproportionate reward for nothing, or promising us a great outcome, without any hard work or effort from our side — let’s pause and think. If it is too good to be true, then most likely it can’t be true. At the least, let’s do more checking, more verification on these kinds of claims before making a decision.
Ponzi schemes work on this trap. The Ponzi scheme is named after a swindler named Charles Ponzi, who orchestrated his first scam in 1919. His company promised returns of 50 per cent in 45 days, or 100 per cent in 90 days. Due to his success in an earlier postage stamp scheme, investors were immediately attracted. Instead of actually investing the money, Ponzi just redistributed it and told the investors they made a profit. The scam was eventually exposed in 1920 and Ponzi was arrested. But he was hardly the last. Bernie Madoff did the same thing with his investors, and in India we have countless cases of scamsters who exploit this decision trap. There are multiple times this trap springs up in regular, everyday business decision making.
The announcement by the Finance Minister to merge 10 public sector banks into four seems to fall into this category. On the face of it, it seems like a bold and radical move. But looking at the history of some of the past mergers and the mess within the merging banks, it reminded me of Scott McNealy’s memorable one-liner on the HP-Compaq merger in 2002. “The visual I see is a slow-motion collision of two garbage trucks.” Several mutual funds have been falling over themselves to tank up on the merging bank stocks. Wiser heads will stay away because this sounds too good to be true.
Urgent vs important
This decision trap forces us to value what is urgent, over what is important. The venture capitalist is making, what he promises is an over-the-moon deal. You want to do more homework, but he says, “My offer expires the moment I walk out of that door in 30 minutes.” We immediately feel the pressure of urgent. All the things that are really important to us fade into the background. We hear a salesman telling us “buy now” “sign here now” and they will make things look very urgent. But that very push for urgency, must cause us to pause and think. This trap also exploits a related trap, called FOMO or the fear of missing out. We think that if we wait, that attractive job offer from a prized company will be gone. If we wait, that craved for product will be sold out. But this pressure often leads to poor decisions.
We need to counter this by bringing back into focus what is important to us and asking if we’re compromising those important things in haste. Very often, an unreasonable deadline for long-term and high impact decisions, is best met with a firm no.
The sunk cost fallacy
Sunk cost means that we have either invested time or money in something and even though we discover that it is not worth it — because we have spent that time or money — we keep at the same thing.
We’ve bought movie tickets. After 10 minutes, we realise it’s a lousy movie but, because we’ve spent money, we continue watching. We’ve ordered a meal at an expensive restaurant. When we start eating, we realise the taste isn’t good, but because we’ve committed so much money, we force ourselves to keep eating.
This is the sunk cost fallacy. Sunk cost, as all of you business students will know, is the financial term that refers to money that an organisation has already invested in an initiative or a project. The money will not come back. So often a company keeps stubbornly pursuing the same path hoping to get a return.
This trap again leads to poor decisions and poor consequences. We need to think clearly about what we really want and whether it is wise to re-visit our decision.
Imagine you are travelling from city A to city B. Mistakenly, you take a wrong road to city C. After travelling more than half the distance you realise you are on the wrong road. Do you tell yourself — “Oh I’ve travelled so far down this road, might as well go the rest of the way.” No – as soon as you realise your error you take a U turn and head back till you reach the right road. Going four-fifths of the way down the wrong path is no justification to continue the balance one-fifth. We should apply the same logic to our business and personal decisions. Let the sunk cost fallacy not cost us much heartburn and regret.
The herd effect
This is when we go along with the rest of the crowd. When we see others doing or saying something, we do the same or we agree — even though we know we shouldn’t be going along.
Let’s look at the financial crises and how this trap was at play in two ways. One, it was at play within the banks with investment bankers herding together in selling risky products and taking advantage of gullible customers. Even though the ‘inner voice’ told several of them it was wrong, the ‘everybody’s-doing-it’ argument was hard to resist. It was also at play with investors, who also seemed to be rushing after the same risky but supposedly incredible investments. There too, the herd effect was at play. The stock market, in fact, lives and breathes on groupthink and group behaviour. Nobody pays attention to what Jonathan Sacks said, “The wisest rule in investment is: when others are selling, buy. When others are buying, sell.” The exact opposite of the groupthink or herd effect trap.
To counter this, we must be confident, we must have a deep conviction about what is right and wrong, what is fact-driven versus what sounds flaky, and then, we will find the courage to not follow the herd. That’s a key quality of a leader.
The next time important decisions come up, look within and around for the decision traps. Let’s learn to be more conscious and deliberate in our decisions, for there is wisdom in the old adage about deciding in haste and repenting at leisure.