What Goes into Your Risk Management Decisions?
Think about the last time you had to make a big decision. Did you find yourself feeling exhausted by the prospect of making yet another choice after a day of decision-making at work and home? Did you feel the need to grab a snack (or two)? Did your research support your choice, or did you consider other perspectives?
When it comes to making decisions, especially risk management decisions for your business, knowing “why” you’re making decisions the way you are and “what” factors into those decisions is crucial.
Biases in the Decision-Making Process
First, we often use previous experiences to inform our decisions and estimate what might happen. This is part of what sets us apart from artificial intelligence (AI). Computers don’t understand the concept of close enough, and they overheat when trying to consider countless variables.
The one thing we need to understand is that our brain uses shortcuts — like getting a “ballpark” answer instead of stressing over finding an exact answer — so we can make decisions faster without using as much energy. This is where biases come into play because we are often not remotely aware that we are using these shortcuts.
Some of the biases that can affect our decision making include:
This is where we seek out information that confirms pre-existing beliefs. Our search algorithms often help us get stuck in confirmation bias.
This type of bias is where we rely on the most easily available information and believe that what we see must be all there is.
Here is where we overestimate our ability to predict the outcome of past events based on knowledge gained from hindsight. For example: “I just knew the Chiefs were going to win the Super Bowl.”
Much like in the name, this is where we give greater weight to negative experiences or information compared to positive.
Sunk Cost Fallacy
This happens when we continue to invest time or resources in a project, even when it will not produce positive return.
Anchoring bias is where we rely too heavily on the first piece of information encountered.
Again, just like in the label, this is where we’re more motivated to avoid losses than acquire gains.
Taking time to consider your biases and the potential mental shortcuts you might be using can help you make the right decision in your personal life and for your business, clients, and employees.
Simplifying the Decision-Making Process
In “The Art of Strategic Decision Making,” human psychology researcher Peter Hollins describes how we can simplify some of these decisions and take even complex decisions and break them down more effectively.
As part of this, we must take into account the transaction costs and understand decision fatigue. The human machine — that’s us — can only make so many decisions in a day. The longer the day wears on, the more difficult it is to make decisions without decreased efficacy. To overcome decision fatigue, we should:
- Time decisions wisely, meaning early in the day, early in the week, and after a break.
- Get the trivial decisions off your plate. Ignore or delegate what you can or pick the “good enough option.”
- Eliminate the time anxiety by allotting more time than you need to make the decision, but don’t procrastinate!
- Make sure you’re not hungry or have snacks to keep the mind energized. I think we’ve all made hangry (hungry + angry) decisions that we later regret.
Decision Making by Pros, Cons, and a Scoring System
Another model Hollins suggests comes to us via Ben Franklin (yes, that Ben Franklin) — the pros and cons list. Hollins makes a few adjustments to the classic approach by adding another layer of consideration for what is important to us by including a scoring system.
When you make your pros and cons list, go back to each item and score it 1-10 based on how important it is to you. Add up your scores from each column to gain a better understanding of how much the pros and cons matter to you before making the decision. Here’s an example for buying a new car:
|Better gas mileage||6||High payment||9|
|Look cool to my friends||2||Insurance||6|
|Less maintenance||4||Limited models||2|
|More trunk room||7|
You might initially see that the pros outweigh the cons and think, “Guess I’m getting a new car!” This is where the scoring system can make a difference.
Set a scoring requirement for purchase. For example: The score for the pros must be twice as much as the cons, so a pros score of 19 and a cons score of 9 would mean you’re ready for a new ride. In the example above, the current scores of 19 and 17 don’t meet the limit.
By requiring the pros score to be twice of the cons, you can ensure the cost and energy you used to make the decision were worth it. If there’s not enough upside to your decision, you’ll be easily bored or disappointed with your choice.
As a last step to really make this process more effective, try adding another choice. Most decisions in life aren’t binary but instead contain many decisions in between. Always remind yourself that decisions don’t have to be binary.
Making the Right Choice for Risk Management
These tips are helpful for more than your personal decision-making process; they can help you make smart choices and contribute to the risk management strategy for your business and employees.
Are you interested in learning more about this? We’d love to talk. Simply reach out and let’s get the conversation started!
Published on: 10.02.23