6 Reasons Really Smart People Make Really Dumb Decisions

Smart people aren’t just wise. Smart people make smart decisions. Which means they avoid falling prey to these all too common traps.

What happened? We’re human. That’s why consumers aren’t always rational. That’s why markets aren’t always rational. That’s why some middle-aged men think unbuttoning the top two buttons of their shirts is a good look.

If you want to make consistently better decisions – especially when the choice you make is extremely important – make sure you avoid the following mental traps.

1. Loss Avoidance

We all tend to strongly prefer to avoid a loss than to acquire a gain. (Put more simply, we’re much more likely to try to avoid losing $500 than to try to make $500.) How much more do we want to avoid a loss than acquire a gain? Research by Daniel Kahneman, author of the great book Thinking, Fast and Slow, indicates that losses are two times as psychologically powerful as gains. (Meaning a bird in the hand does seem worth two in the bush.)

That bias is understandable. A loss means giving up something you actually have. Not acquiring a gain means giving up something theoretical rather than actual. If you have a chance to make $100 but don’t, that stinks… but if you have $100 and lose it, that really stinks.

The problem with loss avoidance is that it typically means you default to the status quo. Say you decide not to attend a networking event because you don’t want to give up an hour of your time. Fine – but what if you might have met the perfect partner for a joint venture? Or say you decide you don’t want to invest $20,000 in your business because you hate the thought of losing it. Fine – but what if you might have created a product line that would create a great new revenue stream?

The key is to properly value the potential loss. Often what we may lose isn’t as valuable as we might think.

And think of it this way: You can recover from almost any loss, but will you someday recover from not having done everything possible to achieve your dreams?

2. Recall Bias

Scientists call recall bias “availability heuristic” (which is why I refer to it as recall bias).

Recall bias says that if you recall something, it must be important – or at least more important than an alternative not as easily recalled. That means we tend to give heavy weight to recent information and form opinions and make decisions biased toward whatever is recent.

For example, if you read about a shark attack, you’ll naturally decide shark attacks are on the rise – even if no others have occurred in the past twelve months. It’s recent… it must be a trend. Or if you read about fighting in Syria you might think we’re living in exceptionally violent times – when in fact we’re living in the least threatening period in history.

Part of the problem lies in our unprecedented access to information. Unlike in years past, when something happens now, we know about it. So you read about one robbery in Jamaica and assume the island is unsafe… and you cancel your trip. Or you read one bad review about a vendor and decide that firm is not worthy of your business… and you go with what is actually a worse option.

And here’s a further problem: The more inflammatory or sensational the event, the more you’re likely to remember it, and the more weight you’re likely to give it when you make a decision.

Recall bias says, “Well, I remember that … so this must be true.”

But that doesn’t mean this is the whole truth – or in any way indicative of a larger truth.

Always use what you recall as a springboard for doing more research to make sure you know everything you need to know… not just what you remember.

3. Survivor Bias

Survivor bias is focusing on people or things that “survived” while overlooking those that did not simply because they aren’t visible.

For example, Ryan Gosling dropped out of high school when he was 17 and moved to L.A. to pursue acting. It worked spectacularly well for him, but what about the thousands of kids who drop out and move to L.A. in hopes of making it? Did they all become movie stars?

Nope – but you never hear about them.

The same is true for Steve Jobs, who dropped out of Reed College so he could “drop in” on classes that interested him. It worked for him, but what about the thousands who don’t finish college? Did they all become billionaires? Nope – but you never hear about them.

Michael Sheerer talks about how advice about commercial success distorts perceptions by ignoring all the businesses and college dropouts who failed. University of Waterloo professor Larry Smith says, referring to Jobs, “And what about ‘John Henry’ and the 420,000 other people who tried ventures and failed? It’s a classic case of survivor bias. We make judgments about what we should do based on the people who survived, totally ignoring all the guidance from the people who failed.”

The problem with survivor bias is that it doesn’t really indicate whether a strategy, or a technique, or a plan will work – and especially whether or not it will work for you. Train like Lindsey Vonn and you probably won’t become the best downhill skier in the world. Be as outspoken as Charles Barkley and you probably won’t manage to also be as widely liked. Never base your plans solely on a blueprint that worked for an outlier. Work hard to know yourself: your strengths, your weaknesses, and what will make you happy.

Then you can determine the best path for you to take.

Source inc.com

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