Behavioral Economics

The McKinsey Quarterly has a great article (registration required, but free)about why good executives sometimes make bad decisions. Our brains have evolved to make quick decisions, and give us confidence in those decisions even when they aren't always correct. These neurological/psychological quirks can wreck business decision making. Eight flaws are listed, but here are two favorites:

#8: False Consensus
People tend to overestimate the extent to which others share their views, beliefs, and experiences-the false-consensus effect. Research shows many causes, including these:

confirmation bias, the tendency to seek out opinions and facts that support our own beliefs and hypotheses

selective recall, the habit of remembering only facts and experiences that reinforce our assumptions

biased evaluation, the quick acceptance of evidence that supports our hypotheses, while contradictory evidence is subjected to rigorous evaluation and almost certain rejection; we often, for example, impute hostile motives to critics or question their competence

groupthink, the pressure to agree with others in team-based cultures

#5: Sunk Costs Effects
A familiar problem with investments is called the sunk-cost effect, otherwise known as "throwing good money after bad." When large projects overrun their schedules and budgets, the original economic case no longer holds, but companies still keep investing to complete them.

A must read for anyone in a management position. Also, How We Know What Isn't So by Thomas Gilovich is an excellent book on this subject.

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