Owning and operating a business means making dozens of decisions every day that directly impact your company. Simple managerial mistakes can cause long-term harm to a small company. Humans are often susceptible to being irrational. Anyone who’s read up on behavior economics knows how easy it is for us to make bad decisions.
Throughout the day we have to make thousands of small decisions. Walking, for example, is just a bunch of micro-decisions that we make such as which foot to put down and where. All of these decisions come together to bring us into motion.
Consciously making each of these micro-decisions would be exhausting. How would we focus on where we’re walking?
Luckily, we go do many of these things on autopilot. It leaves room to focus on more important activities that require our attention.
The issue with being on autopilot mode is that it can lead to jumping to the wrong conclusions. Owning a small business leaves very little room for mistakes. When you’re operating a company, keep in mind these 5 decision bungles. Knowing to avoid them will polish-up your decision making and improve the success of your small business.
Managerial Mistake #1: Decisions influenced by Emotions
Chances are you’ve been warned many times throughout your life not to make emotional mistakes. But sometimes it’s harder than you think to identify when your emotions are the driving force of your decisions. For your business, this can be lethal.
Bad moods can make us terrible decision makers. If you’re upset and annoyed about something, try to hold off on that important decision you have to make. Take a cool down period and try to work through your own issues before putting the health of your business at risk.
Managerial Mistake #2: Sunk-cost fallacy
The sunk-cost fallacy is one of the most frequent irrational decisions on the list. Often times business owners make the mistake of not exiting a failing investment opportunity. This happens because once you become emotionally invested, it can be hard to abandon ship. What if you paid $1000 dollars for a Bitcoin, only for the price to fall $400 the next day? Just because you already put in an initial investment of $1000 doesn’t mean it’s worth it to stay in.
You’ve already sunk in the cost. Time, money, or emotions have already been invested. But you can’t take those costs into account when looking to the future. It is illogical decision making to think that these costs will somehow influence the future.
In order to avoid getting sucked into the sunk-cost fallacy, you have to forget about the sunk cost. Prepare yourself with the new options, and forget about what you’ve already put in.
Managerial Mistake #3: The Halo Effect
Liking a person can often cause us to ignore their negative characteristics in favor of the positive ones. When we like someone, we want to look for the good things about them. This can be sometimes detrimental to your company’s workplace.
The Halo Effect is an important fallacy to consider when evaluating one of your employees who may be doing poorly. What can happen is that you may hire someone who had a successful interview. They seemed great at the time, but after a while, the employee started to underperform. As a manager or small business owner, you might completely ignore these bad performances and instead only focus on the good traits of the employee in question.
Your business can suffer because of this. It’s damaging to your decision making and ability to judge others. Try to identify the biases you have and remove them from your decision-making process. Employees that are hurting your company are a liability. In order to ensure the well-being of your business, evaluate your workforce with clear eyes.
Managerial Mistake #4: A depleted ego
A common source of bad decision-making stems from being drained. Whether it’s physically or mentally, being exhausted can cause you to be less critical. Ever been so tired after a day full of conferences, presentations, or other stressors? Moments like these leave your mind in a state of working automatically, to give you a break.
So, when you’re exhausted and drained, you’ll often handle tough choices by counting on your instincts. Your mind will revert to automatic processes, rather than critical thinking. Small business owners especially are prone to taking on many responsibilities. Thus, you should be careful to avoid leaving important decisions to after running a company all day.
Managerial Mistake #5: Confirmation bias
Confirmation bias is another psychology concept that can heavily apply to your small business. It’s very similar to the Halo Effect, but rather than being about people, confirmation bias affects our held beliefs about things. This phenomenon impacts our ability to be open-minded and makes it hard to change our current opinion. Confirmation bias says that when we have a belief, we tend to seek out facts that confirm the belief. Generally, people subconsciously ignore information that goes against their held opinion.
As an example, if a small business owner is excited to about using a newly implemented hardware product, in which 20 of the employees are users, the owner might already be set on their high opinion of the product’s quality before it’s even put in use. Therefore, the small business owner would be inclined to listen to the five employees who like using the product, while ignoring the other 15 who don’t.
In almost all cases, there’s evidence to confirm our beliefs, whether or not that belief is necessarily right. Being a small business owner means you need to be conscious of confirmation bias. Always take note of facts that go against your held opinions and you will better be able to evaluate decisions from an objective standpoint.
Whether you’re running a small business from the office or the in the front lines of operation, being able to make rational decisions is essential for your company’s survival. Every day, dozens of important decisions must be made and as a small business owner, you must be able to execute them with a clear mind. Avoiding lapses in judgment can mean the end of your business. Over time, you will become a powerful decision maker and your small business will thrive.
Ian is a student of Business at the Honors College at the University of Alabama.
Contact Ian at firstname.lastname@example.org