Posted on Wednesday 13 November 2013 by Ulster Business

David Meade

For the first time in years it feels like the business community is breathing an exhausted sigh of relief.

The general – if cautious – consensus seems to be that our economy is finally being released from 'fiscal intensive care' and resting comfortably in the recovery ward.

So there's never been a better time to take a second look at what makes our organisations tick, and explore how we can capitalise on burgeoning consumer confidence.

When it comes to bettering our businesses, few changes make more impact than those that improve the fundamentals: leadership, decision making, and strategy. These areas underpin the critical success factors that drive your organisation, and they all have one thing in common – people. Leaders are the people whose responsibility it is to catalyse efficient and effective decision making across their operation, and inspire the teams and individuals to roll out and troubleshoot the strategies that will make or break your recovery.

There's no doubt that you have some extraordinary human capital in your organisation already, and we'd love to believe that our people are perfect. The truth of the matter is, though, that a huge body of research has shown that every single person in our organisation can fall victim to common psychological blunders that hamper innovation, stifle strategies, and even cost companies money each and every day.

The biggest blunder of all stems from confidence, is fostered by enthusiasm, and yet while characterised by the greatest of good intention could spell disaster for you, your organisation, and your balance sheet.

SCHOOL BOY ERROR

Entrepreneurs love a hunch. Few things get their commercial juices flowing more than seeing a niche that could be exploited, or spotting an opportunity to leverage their experience against a new opportunity to make a sale. Take Philip, the junior car salesman aged in his early 20's, working at one of the country's largest motor retailers.

Philip has worked on the forecourt for five years and had extraordinary success with year on year growth selling affordable and efficient small vehicles to the school leaver student market. Seeing that these make up 90% of his sales, he spots an opportunity to capitalise on this trend and opens his own competing business across the road, focusing on this market that has been so bountiful for him in the past. He knows this market is a sure commercial certainty, because he's got the experience to back it up. Or does he?

In actual fact, the well-meaning budding entrepreneur shows evidence of one of the most damaging psychological mistakes any businessperson can make, known as The Confirmation Bias. In short, we take a small piece of information or experience, and look around for evidence to support and bolster it's value to build the case for whatever action we want to take. We tend to pay much more attention to the information that confirms our hunch, often ignoring all else.

So enthusiastic are we to roll out our new idea, we are blinkered to the warning signs around us that are hinting at a less than rosy picture. Since it accounts for virtually all of his sales, he's certain it's a flourishing market that's sure to grow at its current pace. While his margin is small, his volume justifies focusing on this narrow niche. More likely though, he's ignoring all the other factors that are at play.

He's the youngest salesperson on the yard so tends to attract queries from younger browsing customers, which in turn just happens to lead to more sales from this category. He drives a small efficient car himself so he tends to know a little more about their performance, and can speak more authoritatively about them than other staff who are older and drive more family-oriented vehicles.

More likely though, the more senior sales staff would much rather focus their effort and attention on high value vehicles to drive their yield and commission, so they leave the smaller budget leads to Philip.

Philip is falling into the psychological trap of only paying attention to the factors that confirm his 'hunch' and in doing so is sleepwalking into a disastrous investment. He feels like it's a market brimming with potential, because his skewed experience is clouding his ability to make a reasoned judgement. We all make this mistake every day: convincing ourselves that moving to new office space will give our business better visibility, but ignoring the dramatic increase in operating cost that it might incur over your current address; or delighting in the charisma and charm of an interviewee that we are certain could give our team the motivation they need, we gloss over the fact that their experience and competency in the field is much less than we had hoped for.

BACK AT THE OFFICE

As human beings, we are all equally susceptible to this particular managerial gaffe, whether we are a CFO, or a secretary. We've all heard the romantic stories about entrepreneurs that have put their lives on the line and won big by following their dreams and ignoring all the nay sayers. The truth is even those stories are an example of how powerful the confirmation bias is – the failure stories aren't particularly inspiring or memorable unless they have a happy ending.

So the next time you find a piece of information or data that convinces you once and for all to take a giant leap, remember to take all information with a pinch of salt. That includes this article!

About David

David is a researcher and lecturer in international business with one of Ireland's leading universities, whose personal interests have always focused on aspects of popular psychology, consumer behaviour, and choice. He's driven by a passion for understanding how and why we think the way we do. David has become a sought after international speaker and corporate advisor in the USA and Europe with a reputation for an innovative style that forces audiences to think critically about the challenges around them. In this series of articles for Ulster Business, he'll cultivate a wide range of cutting edge research in management and leadership to help you achieve peak performance. Find out more about David's work on www.davidmeade.co.uk and follow him on twitter @davidmeadelive

 

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