How to make mistakes Don’t make bad decisions because you didn’t know any better This is serious… And it might come as a surprise, but from time to time, I’ve been known to make bad decisions… And weirdly, some of my clients do too. Bad decisions will cost you money, cost you time and eat into your profits. In the worst case, one bad decision can totally kill off your business. Actually we all make bad decisions, and most of these “mistakes“ are not caused by a lack of knowledge or a shortage of skill. Often they are errors in judgment, caused by one or another of the basic personality flaws, the kind that are deeply imbedded in our brains and our culture. What follows is the first half of a list of common ways entrepreneurs – and other people – decide the wrong way to do the wrong things. I adapted this from something I saw in a quirky book called “Seeking Wisdom – From Darwin to Munger,” by Swedish author Peter Bevelin. They say that recognition is the first step on the road to recovery. If you’d like to make better decisions and avoid some mistakes in the future, it would help to first understand how you make them. Study the list, zero in on the parts that apply to you. Resolve to, at the very least, notice when you are making these mistakes, and fix them. Okay, here goes: 1) Liking things similar to the things you already like. If you like “A”, you are predisposed to think well of anything similar to “A.” This is the basis of a lot of advertising. After all, why do we say sex sells? Because we like sex, and, by association almost anything else. If I like playing golf, I may be predisposed to think that golf products make good investments. (They generally don’t.) The same mistake goes for disliking “B.” 2) Underestimating the power that rewards and punishments have on our thoughts and actions. People are biased towards taking action and moving towards whatever we are incentivized to do, and we try avoid doing what will get us punished. As decision makers the trick is to explicitly understand the rewards and punishments implicit in the decision you’re making. For instance, you end up making a purchase decision based on the recommendation of a salesperson who is paid a special bonus for selling that product during a promotion, without considering that their expert opinion is biased. 3) Forgetting that people act primarily to serve their self-interests. This is related to the mistake above. People ALWAYS act to increase their personal self-interest. This is fine (and to be expected) as long as your interests align with theirs. The problem is that realizing this may lead you to think that people’s actions are guided by some higher truth. For the most part, they are not. 4) Having an unrealistically high opinion of our own abilities, and tending toward seeing a rosy future. As an entrepreneur you probably have a pretty high opinion of yourself. And just as likely, you’re optimistic about the future. Together these two qualities make it hard for you to evaluate the potential success of a project, especially one that hinges on your personal skills, abilities and business acumen. After all, you’re going to make it happen, aren’t you? How could it be any other way? 5) Wishful thinking and other distortions to reduce perceived pains. When you are in some kind of pain – physical or emotional or financial— any kind of discomfort – you tend to act on things you believe will alleviate that pain. And your belief that something will help grows stronger the longer the pain goes on. After a while anything with a remote chance can look like a winner. Wishful thinking starts to seem quite grounded, and grasping at straws feels like anything but. 6) Being consistent with past decisions. Psychologist Robert Cialdini makes this point in his book, “Influence.” He calls it “commitment and consistency,” and says that you’ll act in a way to confirm that your past decisions were the right ones. Deal makers use this against you when they repeatedly offer things to which you can easily say “yes,”making it so much easier to say “yes” to something big. 7) Bias towards maintaining the status quo Most people don’t like change. It’s hard-wired into the species dating back to prehistoric times when any change meant some kind of danger. Most of us will go to great lengths to not have to change, including sticking with employees and vendors and, yes, clients, long past the time we should have parted ways. 8) Impatience – having a greater concern and valuing more things in the present, than things in the future It’s easier to make a decision in favor of something we think will bring gains today or tomorrow than for a strategy or a project which may take months, even years, to materialize. This means a fortune-changing project can get sacrificed to something mediocre with a short-term payoff. 9) Comparing things to some random “standard” rather than looking at quantities objectively. This one is weird. Most of us hate abstraction and don’t like to think about things without some reference standard. We’ll compare quantities, even when the underlying things we’re quantifying have nothing to do with each other. Nassim Taleb talks about a study where people who were asked to share the last four digits of their social security number unconsciously used those numbers when estimating the number of dentists in New York City. (I said this was weird.) Taleb calls it anchoring. This introduces a certain randomness into your evaluations, unhinging them from any kind of objective reality. It’s easy to manipulate people this way. Start your negotiations with a firm declaration of the true value: “It’s worth every bit of $2 million, and I won’ take a penny less.” Your counter-party offers an absolute top price of “a million and a half.” You would have been happy with $900,000. 10) Reciprocation This is another one from Cialdini. Reciprocation is another hardwired trait, and is critical to the tribal structure of people, the ultimate purpose of which is to insure survival. We are willing to do people favors and kindnesses now, because we know they’ll pay us back in the future. All well and good, but in the future, you may find yourself making a bad decision because at a certain level you are driven to pay back the favor. I said this earlier, recognition is the first step on the road to recovery, and understanding your how your mind works will pay tremendous dividends in making the right decisions. And making the right decisions will pay huge dividends in terms of sales, profits, happiness and satisfaction. What do you think? Do me a favor and post your comments below. I’ll pay you back some time soon. 26 Responses Peter Bevelin April 17, 2011 My book is easy to find – just click http://www.poorcharliesalmanack.com/seekingwisdom.html or Amazon http://www.amazon.com/Seeking-Wisdom-Darwin-Munger-3rd/dp/1578644283 Reply admin April 18, 2011 Thanks, Peter. And thanks for writing the book. Reply Glenn April 16, 2011 Your summation says it all, Paul. One must indeed first be aware of something and its relative importance before there is any prospect for one to give that something intelligent due consideration. Also of interest, with respect to people who possess a bias toward ‘mistake avoidance’ it is useful to recall what Edison is purported to have said pertaining to the invention of his light bulb, which was essentially that he had not ‘failed’ so many times, but rather, had learned that many proven ways that did not work, each and every one of which yielded learning. It is a fact that we will all make mistakes. It is the fear of making mistakes, driven by a perceived need to be ‘perfect,’ that often prevents one’s willingness to engage activity that could otherwise lead to learning, and of more importance, one’s willingness to place one foot before the other on a path that could lead them somewhere. Concerns that emerge from fear try to convince us that it’s safer where we are than it is where we might wish to go. Understanding the nature of mistakes is certainly helpful if we wish to progress with confidence in the midst of myths that our primitive mind would have us believe. The boogeyman is not so freightening when exposed to the light of day. Neither are actions and relative risks when evaluated within a proper context of understanding. As always, Paul . . . thanks for consistently-appropriate intellectual ‘stimulation’ pertinent to the entrepreneurial experience. Reply admin April 18, 2011 Hey Glenn… You know, I always thought the story of Edison’s 10,000 whacks at the lightbulb was no more than a story told by motivational speakers. Recently I read that James Dyson created 5127 prototypes for his super-cool vacuum cleaner. Reply Ed April 15, 2011 Great list Paul. I need to do a better job with the loyalty factor. I tend to hold on to under performers longer than I should, both on the employee and vendor side. The vendor side is easy, if the product line doesn’t perform or they don’t provide the service I require, they need to be jetisonned. But my ego says, “Hey, I can make this work.” As for employees, I always hope they care about the biz as much as I do, but they don’t and it bums me out. I then get frustrated and tend to do tasks that I shouldn’t. I like that other posters have mentioned great thinkers like Cialdini. I’m currently on a Seth Godin listening kick. I like Seth’s delivery and the way he breaks down his thought process. Reply admin April 18, 2011 Ed, don’t mistake me. I think loyalty is a good thing. Undeserved loyalty is a horse of a different color. Cialdini definitely worth repeated study. There are others. Reply Paul Cronin April 14, 2011 This is so true. I often tell people who think that they have a great idea for a product or service to think about this: How does your solution do any of the following?: 1. Make me more Money? 2. Save me Money? 3. Save me Time? 4. Make me Look or Feel Better? If you satisfy have one of the above, you have a slight shot at success; have two and you have a legitimate shot; have three and it’s gotta work; all four, it’s a home run. BTW – DO NOT invest in a golf business – EVER! I wasted 3.5 years of my life in one. Reply admin April 18, 2011 Paul, sorry to hear that about your golf experience. I know more than a few folks who are crushing it in golf products, however. Reply John April 14, 2011 Thanks Reply admin April 14, 2011 You’re welcome. Reply George April 14, 2011 What a wondful list. I’ll limit my comment to my biggest failing. 7. Bias toward maintaining the status quo by sticking with employees, vendors and clients could be considered being loyal. I read somewhere Donald Trump, like him or hate him, is very loyal. I think developing an inner circle of trusted colleagues is a challenge or at least it is for me. Finding a good master mind group would probably be the best option but that is easier said than done. One master mind group treated me like a customer and one member actually spammed me. Of course, I am no longer a member. As a note, in my opinion Charles Munger is one of the smartest people on the planet and deserves a lot more credit for the success of Berkshire Hathaway than he gets. He is very patient and is a perfect example of implementing strategies that he knows will often take years (decades) to materialize and he’s ok with that. Reply admin April 14, 2011 George – Loyalty is something that has to be earned and maintained, and, in my opinion, actually has little to do with hanging on to the status quo. This is definitely a source of confusion. –pl Reply Crystal* April 14, 2011 As always, sound advice. C* Reply admin April 14, 2011 Crystal, I’m not sure I can tell you how to get the funds into Canada. My advice would be to set up your entity, your merchant account and your merchant bank in your province, rather than in the US. Reply Dave April 14, 2011 Paul.. once again.. tremendous wisdom on your part. It is so wonderful and consistently eye-opening to read your blog postings. Thank-you once again. Dave Munday Reply admin April 14, 2011 You’re welcome, Dave. Reply John Susko April 14, 2011 Paul, As usual your insight gave me plenty to think about. Great article. I have to admit I found myself in nearly every one of your categories. Is that the “curse” of being an entrepreneur? This post will provide me with check list that I can use like a ‘business compass’ (maybe I should trademark that term) from now on. Thank you for always delivering great fresh content. John S. Reply admin April 14, 2011 John – I think it’s the curse of being human. Awareness is the cure, which makes the checklist idea valuable. Reply J Bushnell April 14, 2011 I am reading the book ‘Seeking Wisdom’ and would recommend a copy to anyone seeking to improve their decision making skills as well as understanding their natural underlying negotiating bias. Reply admin April 14, 2011 This is not an easy book to find, nor an easy one to read. If you can get past the writing style, it’s worth it. Reply Maria April 14, 2011 Hi Paul I have read Cialdini and a number of other similar books. There’s a great one out there by Carol Tavris which is worth a read (can’t remember the title). You make some great points and I would be the first to admit making some basic and costly errors. Thanks for the reminder. Maria Reply admin April 14, 2011 Maria, I’d say Cialdini is worth an annual re-read, especially if you can read it with fresh eyes and a fresh mind. I find that I have a tendency towards skipping over parts I remember too well. You have to resist that urge. –pl Reply warren April 14, 2011 This is great, true and I agree. I would like to send it to a few people is you do not mind? Thanks, Warren Reply admin April 14, 2011 Warren, I don’t mind at all. -pl Reply Sean April 14, 2011 A couple of those points were a bit too true…. 7 and 10 inparticular got me thinking! Reply admin April 14, 2011 Sean, really. The status quo? No kidding! Reply Leave a Reply Cancel ReplyYour email address will not be published.CommentName* Email* Website Δ This site uses Akismet to reduce spam. Learn how your comment data is processed.