Decision-Making Traps Part 6: The Estimating and Forecasting Trap
In our previous post in this series, we introduced “The Hidden Traps in Decision Making” by John S. Hammond, Ralph L. Keeney, and Howard Raiffa, in which they describe six traps in organizational decision-making that can adversely affect performance. This week’s post covers the final trap, the “The Estimating and Forecasting Trap”. Even though most of us are not very good at making estimates, we tend to be overconfident about our accuracy – which can lead to bad decisions. There are three different traps that can have a particularly distorting effect in uncertain situations because they cloud our ability to assess probabilities.
- The Overconfidence Trap – Tend to be overconfident about our accuracy
- The Prudence Trap – Over-cautiousness or prudence
- The Recallability Trap – Base predictions of future events on the memory of past events.
Big Sky sees this trap in our clients especially when executives have strong domain or market experience. In addition, because very experienced people have excellent instincts, they can overlook trends that change the implicit assumptions in their mental decision-making process. For example, Clayton Christensen’s work on Innovation shows how the excellent customer-focused instincts of executives can actually crush the development of new, market-changing products. You can read more about Christensen’s “Innovator’s Dilemma” here.Techniques to overcome:
- Start by considering the extremes, the low and high ends of the possible range of values
- Challenge estimates of your subordinates and advisers (overconfidence trap)
- Always state your estimates honestly and explain to anyone if or not the estimates have been adjusted (prudence trap)
- Carefully examine all your assumptions to ensure they’re not unduly influenced by your memory (recallability trap)
Closing thoughts on Decision-Making:
When it comes to business decisions, there’s rarely such a thing as a no-brainer. Our brains are always at work, sometimes, unfortunately, in ways that hinder rather than help us. At every stage of the decision-making process, misperceptions, biases, and other tricks of the mind can influence the choices we make.
The best protection against all psychological traps – in isolation or in combination – is awareness. Forewarned is forearmed. Even if you can’t eradicate the distortions ingrained into the way your mind works, you can build tests and disciplines into your decision-making process that can uncover errors in thinking before they become errors in judgment.
Labels: decision optimization