How Decision Traps and Risk Perception Can Influence the Choices You Make

In this article featuring Laurel Austin, Associate Professor of Management Science at Ivey Business School, we explore some of the most common decision traps that individuals tend to fall into and share strategic tactics that leaders everywhere can use to avoid allowing their biases from influencing decisions.

We're not as "rational" as we think.

If you ask people how they make big decisions, most would probably say that they evaluate the situation, consider the alternatives, and then make the “rational” choice. Unfortunately, science has found that most people are not as rational as they like to believe.

Decades of research shows that the human brain is wired in a way that can undermine the decision-making process, and while no one sets out to make a poor choice, these ingrained psychological traps often influence the decisions we make.

“It has to do with our cognitive limitations,” explains Ivey Business School Professor and globally-recognized behavioural decision scientist, Laurel Austin. “Our brain just can’t hold that much information, so it has created shortcuts.”

For strategic leaders faced with multiple decisions each day, understanding common decision-making traps, and how to avoid them, can mean the difference between failure and success.  

Common Decision Traps

Framing Trap

It’s difficult to make the right decision if you don’t ask the right question to begin with. That’s why the framing trap is one of the most dangerous pitfalls in the decision-making process, and also one of the most common.  

The way a problem is framed can influence how information is gathered, presented, and evaluated. “In particular, if we frame a problem in terms of potential loss, people are more willing to accept a risky choice. If we frame in terms of possible gains, people become more risk averse,” Austin says.

The best way to avoid this trap is to reframe the question in several different ways and to reflect on how your decision-making might change in each instance.  

Confirmation Trap

Confirmation bias refers to our natural tendency to seek out information that supports what we already believe to be true.

“Our brains are quite good at finding confirming evidence. It’s not a deliberate thing,” says Austin. “What often happens is we have a gut instinct that something feels right, and then we look for information that confirms it while rejecting or reinterpreting information that disconfirms it,” she explains.

This doesn’t mean that we should ignore our instincts. But before making a final choice, make sure you examine all the evidence, ask someone to play devil’s advocate, and keep an open mind when considering opposing viewpoints.  

Anchoring Trap

Anchoring is another common decision trap.  “Anchoring often comes into play with numbers,” says Austin. “Once you have a number in your head, even if it’s a random number, your mind tends to anchor around it.”

Anchoring happens because the brain gives too much weight to the first information it receives. In business, this could be an opening bid in a negotiation, last year’s sales figures, or past consumer trends. But relying too heavily on limited data – an anchor - while ignoring other information can lead to a poor decision, especially in a rapidly-changing business environment.

To avoid this trap, try to approach the problem from several different starting points, and when seeking the opinions of others, be careful to avoid anchoring your advisors by keeping your own ideas to yourself.

Status Quo Trap

We all know that change is hard. Doing something different means taking a risk, and exposing ourselves to criticism and disappointment if something goes wrong. So, it’s no surprise that we often find it easier to make decisions that maintain the status quo.

Maintaining the status quo could lead to missed opportunities and stagnation, or it could be the right choice – but it should never be your only alternative.  To avoid falling into the status-quo trap, consider the pros and cons of other options, both today and in the future.  

Sunk-Cost Trap

People also tend to make decisions that justify past choices, even when those choices may not have led to optimal results. It can be difficult to admit that we have made a mistake, especially in a business setting.

When in doubt about whether it’s time to cut your losses, solicit advice from people who were not involved in the earlier decision. For leaders, beware of creating a corporate culture where employees are afraid to own up to their mistakes.   

Risk perception and decision-making

In addition to these five well-documented decision traps, Austin says our perception of risk can further undermine the decision-making process by distorting our ability to make accurate predictions. 

“Risk perception is a tricky thing since it’s unconscious,” she notes. “We tend to decide what we want to do, and then assess the risks. If it’s something we want to do, we assess the risks as lower. If it’s something we don’t want to do, we assess the risks as higher.”  

“We also tend to accept risks that we feel we are familiar with, that we choose, or that affect us in the short term,” Austin continues.

Here are five ways that risk perception can influence the choices we make.      

Overconfidence Trap

Confidence is generally a good thing, but when people overestimate their abilities, it can lead to faulty decision-making.   

“When we think we are better at something than others, or think we exert more control over what happens that others do, we become overconfident in our ability and take more risk than we otherwise would,” Austin says.

The overconfidence trap can have serious consequences for business decisions, which are often based on estimates and forecasts. That’s why it’s so important to use a range of values when making predictions and to consider the implications of each scenario before choosing a course of action.    

The overconfidence trap also comes into play for people working in high-risk environments. “When people do something every day and perceive they haven’t been injured, they start to lower the perception of the risk that they face,” Austin explains. “This can cause challenges for organizations that want people to be aware that they are in a risky situation and to use proper procedures.”    

Prudence Trap

When it comes to managing risk, being too cautious can be just as problematic as being too confident. Making plans based on the worst-case scenario often adds significant cost, with little added benefit. Considering a range of values and asking others to provide objective input can help avoid the prudence trap.   

Hindsight Trap

Hindsight is anything but 20/20. In fact, it’s human nature to remember having predicted the future better than we actually do, and because our decisions tend to be influenced by our memory of what happened in the past, it’s easy to fall into the hindsight trap and underestimate future risk. 

“If I always remember being more right in my predictions than I actually was, then I can’t accurately assess how well I knew things in the past. This reduces my ability to learn from my mistakes,” Austin explains.  

To avoid being tripped up by inaccurate recollections, try to base forecasts on statistics or other objective evidence whenever possible.

Base Rate Problem

“The base rate problem refers to the fact that, if a problem is very rare, then the base rate probability is very small. If we see evidence of that problem, we ought to consider the fact that the problem, in general, is very unlikely, so there is still a very good chance there is no problem,” says Austin.

In other words, decision-makers can place too much importance on new information and disregard what they previously knew to be true. To avoid this trap when assessing risk, make sure to take random variation into account and be wary of drastically changing your belief based on one data point. 

Focusing Illusion

The focusing illusion is another example of the brain paying too much attention to unusual events while ignoring more mundane, everyday outcomes.

“If we ignore times where everything seems alright, then we have a biased sample,” says Austin. “To get past this, we need to consciously think about the times where something unusual happened, as well as the times it seemed nothing of note happened.”

What’s a decision-maker to do?  

There is no doubt that our brain is at work during every stage of the decision-making process, and that subconscious biases and misperceptions influence the choices we make. While there is no formula to ensure you make the right decision every time, Austin has several suggestions that can help leaders avoid the most common traps.

Be aware of the dangers

The best defense against decision traps is to keep them in mind from the very beginning of the decision-making process. “Over-optimism and illusion of control are particularly common,” says Austin. “We all tend to think we’re better than average.”

Learn from the competition

Taking the time to learn from the competition can help leaders make better decisions for their own organization. “Businesses tend to forget to look at what their competitors are doing. They forget that they are also moving forward and trying new things,” Austin notes.

Before investing in new technology or making another significant change, see if others have already made a similar choice and learn from their experience.   

Establish good decision-making processes

“We tend to think if a decision turned out well, that we made a good decision. And that if it turned out poorly, we made a bad decision,” says Austin.

Neither assumption is true, which is why Austin encourages organizations to establish good decision-making processes.  

“You don’t want to punish someone who made a good decision, but a bad thing happened. That’s just the risk we took,” she says. “And you want to be careful about rewarding good outcomes. Organizations should look at trends because there is always some degree of luck and variability.”

Build resilience

Making decisions is often about trying to manage future risks – but, as the COVID-19 pandemic showed, it’s almost impossible to plan for something we’ve never experienced before.

“There is a growing recognition that we need to build resilience in organizations, which is the ability to take a hit and bounce back,” says Austin. “That takes investment, and it takes planning for the longer term, which is hard.

“Organizations often have incentives to focus on the short term,” she notes. “And because there is more uncertainty as we look further out, planning for the future is more cognitively demanding.”  

Interested in developing your skills in Decision Making?

Professor Laurel Austin discusses decision traps further and delivers an in-depth and immersive learning experience in the Strategic Thinking & Decision Making Program.

This article was written by Nicole Laidler. Nicole is a Western University graduate, BA '03, MA Journalism '04, and an award-winning journalist and content creator. To see what else she’s been writing lately visit www.spilledink.ca.

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