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5 ways your brain is secretly sabotaging your business

by Kelly Exeter | July 11th, 2017 | 0 comments

Imagine if, every time you needed to make a decision, big or small, you had to stop, evaluate and come at the decision from all directions. If you’re thinking, ‘Gee, I’d never get anything done,’ you’d be right.

That’s why it’s handy that our brains make use of heuristics – mental shortcuts that allow us to solve problems and come to decisions and judgements quickly and efficiently.  

The problem with heuristics, however, is they can often lead to cognitive biases – systematic errors in thinking that lead to poor decisions and judgements. A common cognitive bias is confirmation bias, the situation where we interpret new information in a way that supports our existing theories and beliefs, while ignoring information that contradicts those existing beliefs.

How can this present itself in a business situation? You might have a staff member you think is incompetent. Confirmation bias means you take note of all the situations where they perform poorly while ignoring the instances of them executing their role well. It can lead to you devaluing a worthy employee – something that might cost your business big in the long run when they move on and take their skills elsewhere.

Here are four other cognitive biases that are secretly sabotaging your business:

1. Survivorship bias

Ever read a business book from an aspiring entrepreneur whose business never really got going? Did you see the article in the business news about the baker who went bankrupt?

If you have, you’re in the minority because, as a rule, we’re not interested in failures, we only want to hear about successes.  

This leads to what’s known as survivorship bias: only learning lessons and drawing conclusions from successful outcomes (because the lessons/available conclusions from failure are invisible or underreported).

The most insidious conclusion survivorship bias throws up in business is the idea that hard work is the most important factor in success. This conclusion is easy to form because every success story we read about credits hard work for their achievements. What we’re not reading about are the thousands and thousands of people who were similarly skilled and worked similarly hard – but failed.  

2. Recency bias

Tell me if you’ve played this game in your business: you do a massive month of invoicing, all your clients pay on time for a change, and there is a huge rush of money into your account. You’re flush with cash! You decide to pay all your bills, (even the ones not due for a month!), get that new laptop you’ve been wanting for ages and, ahh, maybe even relax for the first time in ages. It feels nice to be able to take your foot off the pedal for a bit.

In short time, however, your bank account is empty, BAS is due in a week and suddenly it’s panic stations. You get on the phone, email your list, throw something up on social media and hustle, hustle, hustle to get some work coming in again.

What you’re experiencing is recency bias – when we allow our most recent experiences to dictate our decision making.

Recency bias is especially evident in the way small businesses and entrepreneurial types approach marketing. Most only market themselves when work is scarce – something that’s never a good idea because marketing from a position of desperation leads us to make poor decisions. It’s far better to have a marketing strategy that rolls out consistently over the course of a year, and can be turned up (rather than turned on!) in quiet times.

How do we avoid those situations where we spend money because ‘it’s there’ only to find we have nothing in the bank to pay for big bills that appear a month down the track? By running cashflows over several months. If you don’t have the ability to run cash flows for yourself, getting someone to do it for you will be the best money you ever spend on your business.

3. Gambler’s fallacy

Let’s say you’ve applied for five large government tenders in the last three months and been awarded none of them. What do you think the likelihood is of getting the next one you apply for?

Chances are, you think it’s higher than it really is. This is a form of gambler’s fallacy, the idea that the longer a streak goes for, the more likely it is to turn around because ‘you are due’.

Gambler’s fallacy (and its close cousin, the law of averages) can lead to us indiscriminately doing the same thing again and again (i.e. lodging the same tender document over and over, or using the same sales script over and over) instead of investigating why our previous efforts failed.

4. Sunk cost fallacy

You’ve brought in a new staff member, spent thousands of dollars training them, and they’re still not up to scratch. You know they’re not the right person for your organisation but you keep them on anyway because you’ve invested so much into them.

Or, you spend tens of thousands of dollars gaining a university degree, realise two years into your career that you genuinely hate the industry you’re in, but push on anyway because you invested so much time and money in that course of study.

These are examples of sunk cost fallacy, our inability to walk away from situations where the costs are not recoverable. Instead of cutting our losses, we often invest more in the situation. It’s only when things become truly untenable that we grudgingly admit the whole thing has cost us a lot more than it would have if only we’d walked away earlier.

If you catch yourself thinking ‘Well, we’ve gone this far, we may as well keep going,’ there’s a good chance sunk cost fallacy is at play.

Overcoming these biases

How do we stop these cognitive biases from influencing our decision making in a negative way?

Really, awareness is the main thing.

If you’re able to catch yourself in the act of using heuristics that lead to the common biases mentioned above, you’ll be well on your way to stopping your brain from secretly sabotaging your business success.

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