The Psychology of Business Decisions: Are You Following Fact or Feelings?
Date: Tuesday, May 31, 2022
Picture this: you own a chain of high-end jewellery stores. Customers come to you for your superior product knowledge and first-class personal service. Your revenues rise and fall with the quality of your sales team. And you know – everyone knows – who the top-performing sales person is. It’s charming, charismatic, confident John, who believes he can do anything and is the very embodiment of a sales superstar.
Except…when you run the numbers, a different picture emerges. The data shows that Chloe, a young, introverted, relatively inexperienced part-timer is your best-performing sales person. You’re blindsided by this data, since neither you nor anyone else had any idea how good Chloe is. And John? He barely makes it to halfway up the leaderboard.
What’s going on?
In gut we trust
We all know that our intuition affects our opinions and decisions, but you might not realise just how big a role our hunches play in work-related decision making. According to the pivotal “Gut and Gigabytes” survey by the Economist Intelligence Unit and PwC, more big decisions are made based on a leader’s intuition than are made based on data. Worse, bosses often question or dismiss information that contradicts their gut feelings, even when the information is entirely credible. This is known as cognitive dissonance.
Cognitive dissonance is the uncomfortable feeling you experience when you hold two inconsistent thoughts, ideas or beliefs. You reduce dissonance by changing your thoughts or beliefs. Which sounds simple, but there’s a rub: you are less likely to say, “the data is correct, I shall change my beliefs to match the data” and more likely to say, “the data is inconsistent with my intuition so I will ignore this data and seek out information that is consistent.” Cherry picking data to align with our pre-existing viewpoints is known as confirmation bias.
While cognitive dissonance and confirmation bias are the two most common psychological biases at play, they are not the only ones. Others include:
- Survivorship bias, where you pay too much attention to successes, while glossing over failures.
- Anchoring bias, also known as first-impression bias, where you jump to conclusions because you are overly influenced by the first piece of information you receive.
- Overconfidence bias, where you think your personal contribution, effort, intelligence or opinion is more important than it is.
- Halo effect, where someone’s personality traits spill over into your perception of them such that someone you trust in one context could not be wrong in a different context.
- Horn effect, the opposite of the halo effect where your negative impression of someone clouds your judgement of them.
- Bandwagon bias, a type of groupthink where you "jump on the bandwagon" and take action simply because others have done so.
Outsmart the bias with data
How do you overcome these cognitive biases? The first step is to follow the data. Data is the great business leveller – it is unbiased and objective. It helps decision makers see the situation exactly as it is, not how they want or perceive it to be.
However, simply having the data is not enough. It’s nice to think that the ‘numbers never lie’, but we know that confirmation bias exists and that people will manipulate or disregard data to create a slanted view towards their current way of thinking. To stop intuition from dominating, leaders need to insist on data-driven decision making across the organisation, and hold people accountable for their actions. Transparency around decision-making allows decisions to be challenged, which is the best way to prevent false assumptions creeping in.
Experts almost unanimously agree that data-driven decision making is more reliable than intuition-based decision making. According to one Deloitte study, when business leaders champion data-driven cultures, organisations are 77% more likely to significantly exceed business goals and 59% more likely to gain new insights from the metrics they track. Cold, hard numbers are simply more dependable than instinct.
So next time you come across a John in your company, ask yourself: do you know he’s your star performer, or do you only think you know? Then commit to testing your knowledge through data. The results may surprise you.