From the course: Critical Thinking for Better Judgment and Decision-Making

Overcoming dangers of loss aversion

From the course: Critical Thinking for Better Judgment and Decision-Making

Overcoming dangers of loss aversion

- Which of these scenarios would you choose: A, you win $900 for sure or B, you receive a 90% chance to win $1000? If you're like most people, you chose A, the sure deal. How about this one: A, lose $900 for sure or B, receive a 90% chance to lose $1000? If you're like most people, you chose B, not the sure deal. This experiment, borrowed from behaviorists Kahneman and Tversky, highlights how we move to avoid losses more than to achieve gains. Pain from losses impacts our decisions more than pleasure from gains. This loss aversion can negatively impact the quality of your decisions and suffocate your business. For example, you might be less willing to support promising innovation projects with perceived higher risk than consult and back operational improvements. As a leader, you're expected to inspire your team to focus on big ideas and growth. But according to research, because of loss aversion, failed projects are considered twice as bad as equivalent successful projects are considered good. What do you do? The best technique for overcoming this decision glitch is to analyze the quality of your decision process separate from the quality of outcome. Use this decision process scorecard to avoid hyper-focusing on potential losses and also enjoy the benefits of seeing wise decisions even when they result in poor outcomes. Identify a recent decision, like deciding whether or not to invest in an innovative idea. Award one point for each question which you answer yes. Number one, did we use our preexisting decision framework? Unfortunately, if there's no framework there's no way to get a point on this one. Add a framework, use it, and you're guaranteed a point next time. Number two, did we gather relevant information? Number three, did we gather irrelevant information? If yes, you're more likely to consider what constitutes irrelevant information and you'll know what to do with it. Number four, did we list assumptions to challenge? If yes, you'll know what assumptions to bust. Number five, did we make sure our sources are credible? If you answer yes, you'll know where your information came from. Number six, did we detect and eliminate biases? If yes, you'll have already discounted emotion and intuition. Number seven, did we include the right people? Number eight, did we identify at least two alternatives? Number nine, did we weigh evidence supporting the decision? Now if you answered yes to this one you better answer yes to this next one. Did we weigh evidence rejecting the decision? Number 11, did we choose between alternatives beyond yes or no? A good decision process looks beyond yes and no for options. Now score your decision process. If you've scored 11 to 10, great decision process. Feel free to consider the outcome. 9 to 7, good decision process. You're almost there. 4 to 6, okay decision process. Add to your process. And 0 to 3, poor decision process. Improve your process, otherwise you'll never know if your outcomes are preventable mistakes or lucky breaks. For small decisions, remember the mantra: You win a few, you lose a few. This will help you control your emotional response when you lose.

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