Never Go With Your Gut: How Pioneering Leaders Make the Best Decisions and Avoid Business Disasters

“Most cognitive biases result from mistakes made by going with our gut reactions, meaning autopilot system errors”

We have two mental systems that influence our mental processes—the autopilot (emotional) system and the intentional (rational) system. Most people believe that going with your gut is the best way to make decisions because it’s faster and more comfortable whereas the intentional system consumes a lot of energy and works slowly. This may be a good idea if you’re trying to survive in the savanna. But in the modern business world, it can lead to disastrous decisions.

Relying exclusively on your gut instinct can lead to cognitive biases. Cognitive biases result in an inaccurate evaluation of self and others. They also lead to poor evaluation of risks and rewards. Therefore, following your gut can cause you to make systematic and predictable judgment errors that leave your organization in tatters.

To avoid making catastrophic decisions due to cognitive biases, you have to train your intentional system to identify and address these judgment errors. You can learn and utilize techniques that minimize your cognitive biases within yourself, your team, and your organization. It’s okay to use your intuition, but make sure that you always evaluate the situation analytically before making a major decision.

“Every day, you face a series of situations for which you need to decide whether to take the course that feels most comfortable by avoiding losses, or the course that feels less comfortable and leads to more gains over time”

Your brain is wired to avoid losses at all costs, even if there’s a chance that you may make larger gains within the same situation. This tendency is referred to as loss aversion, and it’s a dangerous judgment error you need to be aware of. Loss aversion was a practical way for our ancestors to survive in harsh environments where resources were scarce. But if you’re too focused on avoiding losses in today’s business environment, you may make decisions that hurt your bottom line.

One of the cognitive biases associated with loss aversion is status quo bias. This is where you’re reluctant to adapt your systems or processes to fit a shifting business environment. As a result, your company loses out on opportunities to boost profitability and market share. Another form of loss aversion is sunken costs. This is where you hold on to a project or relationship that no longer provides adequate returns because you’re afraid of losing the capital already invested.

You have to be aware of your tendency toward the different forms of loss aversion. Once you’ve identified it within your organization, examine how it has negatively affected you in the past. Then adopt strategies to help you overcome it so that it no longer taints your decision-making process.

“Why do we give ourselves a pass while assigning an obnoxious status to other people? Why does our gut always make us out to be the good guys, and other people the bad guys? There is clearly a disconnect between our gut reactions and reality”

Part of our human nature is to attribute our bad behaviors to external factors instead of our inner flaws. On the flip side, we tend to attribute the bad behaviors of others to their internal character flaws instead of considering the context of their situation. This is known as attribution error. Sometimes we go further and apply this attribution error to entire groups of people. We see one member of a group misbehaving and we quickly brand the entire group as bad.

Making snap judgments about other individuals or tribes may have been key for our survival in our hunter-gatherer days. But this kind of thinking is extremely detrimental when it comes to the modern business environment. Having an excessively positive perception of groups you belong to while demonizing other groups can create discrimination and a lack of diversity within your organization. Snap judgments can lead to strained relationships, missed opportunities, lack of empathy, and demotivated employees.

You can avoid these bad judgment errors in your daily interactions by learning to appreciate people’s differences in opinions, personalities, values, and beliefs. Though it’s difficult to see when you’re being biased against others, you can train yourself to identify and then address your attribution errors.

“First, we look only for information that confirms preexisting beliefs, as opposed to disproving them. Second, we actively ignore any information that contradicts these beliefs, rather than putting a high value on this information”

A quick study of business history reveals that many successful companies were destroyed by their leader’s inability to perceive reality. When you’re facing a business reality that makes you feel uncomfortable, you’re likely to deny it. Many business leaders do this by looking for information that matches their existing beliefs. Instead of considering the hard data in front of them, they follow their intuition, even as others point out the unpleasant reality.

When you live your life with rose-colored filters, you usually underestimate the signs of a looming disaster. You also claim credit for yourself when a decision leads to success but deflect blame when your decision leads to failure. Sometimes your gut instinct will move you to overestimate an employee’s abilities simply because you like one important characteristic of that individual. Yet your colleagues may be trying to point out just how much damage that employee is causing within the team.

You need to address your tendency to confirm your gut instincts even when the reality around you is throwing up evidence to the contrary. You need to be prepared to face any negative information about people you like or decisions you’ve made. As a leader, be willing to take off your rose-colored glasses and deal with reality, no matter how unpleasant it may be.

“Optimists create the ideas, with an understanding that they are likely too optimistic about the quality of these half-baked ideas. The optimists then hand off the ideas to the pessimists, who select the best of these ideas and finish baking them. The transformation that results is magical”

Leaders are expected to show confidence at all times because it inspires their followers to have more faith in them. A business leader who exhibits confidence when making decisions is regarded as more competent. However, there are times when too much confidence in your judgment can do more harm than good. This is especially true when determining the best course of action for an organization.

When you’re thinking about a solution, you need to show some humility because you’re still figuring out which decision out of many is best for the organization. Overconfidence can distort your perspective and intimidate those who may have a contrary opinion. However, once you’ve evaluated and settled on one decision, displaying confidence to your team becomes necessary.

When making decisions, you need to watch out for optimism and pessimism bias. You don’t want to ignore risks but you also don’t want to be too risk averse. As a leader, you also need to avoid the tendency to overestimate people’s ability to understand your thoughts and feelings. Confidence is a good thing, but you have to keep an eye out for overconfidence-related judgment errors.

“Successful people are uncomfortable with the realization that luck sometimes plays a much larger role in the success of decision-makers than skill. The best that decision-makers can do is maximize the possibility of success, and then roll the dice”

More than money or time, it’s your attention that is the scarcest resource you have. Yet you usually underestimate the importance of your attention, and you ignore the fact that you can leverage it to achieve your goals. As emotional creatures, we often pay attention to factors that trigger our emotions. We assume that these are the most critical things to focus on because they are in our immediate environment. In the process, we overlook more important factors that may be hidden in plain sight.

This type of cognitive bias can manifest in several ways. Your instinct may tell you to focus only on the quantifiable measurements of a business deal instead of the outcomes you want to achieve. You may pay more attention to short-term achievements instead of the long-term growth of the company. You may even delay dealing with a situation because you underestimate the danger of not taking immediate action.

You may face situations where important aspects of an issue are not immediately visible. Your gut may also fail to alert you about potential danger. But in business, you can pay a heavy price for not paying adequate attention to the things that matter the most. Therefore, it’s important to learn how to address any attention-related cognitive biases.