Research has shown that we all think we are smarter and better than we really are. This results in "mind traps" - mental mistakes that can trip up business decisions.

Today's newsletter identifies five of the more common mind traps and offers suggestions for avoiding them.
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Charlie Goodrich 
Founder and Principal
Goodrich & Associates
August 2015 Vol. 4 No. 8
In this issue...
Are These Five Common Mind Traps Hurting Your Business?
Heard on the Street - Middle Class Income Has Risen
About Us
Goodrich & Associates
[email protected]
Are These Five Common Mind Traps Hurting Your Business?

Back when I was in the rent a car business, we lost money hand over foot in New York City. LaGuardia airport, in particular, was a huge profit drain. And so we did a thorough analysis, evaluating our costs, our pricing, our customers and our options for increasing margins.

It was bad news. It turned out that even with a feasible margin improvement, we would need a lot more volume (our breakeven market share was 130%!).

We presented our findings to senior management and recommended either shutting down LaGuardia completely or, due to licensee, corporate account and Port Authority of New York issues, running a limited operation geared towards corporate accounts and minimizing losses.

The presentation was a success and the CEO said he would pass it along to the Board of Directors. The following week, however, we were told to expand operations in New York City. Soon we were losing even more money, validating our analysis.

What went wrong? As it turned out, senior management, particularly the COO, made a series of classic "mental mistakes" in decision-making. Psychologists and academics have identified many of these and you will recognize quite a few.

Here are some of the more common mind traps that can trip up business decisions.
  1. Anchoring. The natural tendency to make "preliminary" or straw man, first impression decisions often leads to ignoring the rest of the data, even when that data does not support the initial decision.

    In the example above, the COO had spent the early days of his career at LaGuardia, working for a much larger car rental company with a large corporate account customer base, higher rates, fewer accidents and facilities that provided tremendous economies of scale. His first impression was formed years before our analysis was presented. Unfortunately, it was based on a different set of facts then we faced at that time.
  1. Projecting our belief systems on to other organizations can get us into trouble. Normally, psychologists think of projecting when we transfer frustrations and bad feelings onto others. But we can also project our own value and belief systems onto others when predicting how other organizations (even countries) will act. This trap led to the Cuban Missile Crisis. How? National security advisors at the time knew that Russia could put nuclear missiles in Cuba, but they didn't think it likely. Kennedy's advisors modeled Russian thinking through American values, beliefs and political systems. However, as Putin recently reminded us in Ukraine, Russians are different. (Note that national security people call this flaw "mirroring," but mirroring means something very different to psychologists and neurologists.)

    The projection trap in business occurs when we think competitors, suppliers and customers will react to events in the same way our company would. But, companies are different in how they are organized, equipped, and otherwise do business; other companies react differently than ours might.
  1. Delusions of clairvoyance. In short, we think we understand what other people are thinking or how they would think, much better than we really do. Research has shown that despite our best efforts, we can't do this with any degree of reliability.

    Same goes for "reading body language," the fallibility of which requires looking no further than the TSA, better known as airport security. They spent gobs of our money putting in place something called, as they only can do in Washington DC, SPOT (Screening of Passenger by Observation Techniques). Three thousand "trained" security guards across 161 airports screened two billion passengers between 2004 and 2008, detained 152,000 of them for further questioning, leading to 1,083 arrests. Terrorists uncovered? Zero. Forty percent were illegal aliens, however, so presumably Donald Trump is happy.
  1. Confirmation bias. This mind trap involves focusing on information that confirms our existing beliefs and rejecting data that goes against it. Humans as a species tend to be overconfident in their own knowledge and opinions, something that certainly tripped up the rent a car COO. Confirmation bias can make anchoring bias worse.
  1. Pattern recognition. While our ability to see patterns in information based on experience is valuable in any number of situations, if we don't check the underlying data, it's easy to identify the wrong problem or cause of a problem. Pattern recognition without data verification often results from a lack of time to make proper decisions, sloppiness, or overconfidence in general.

    A complementary trap to pattern recognition is re-using models in new situations and assuming the old inputs are the same. In the rent a car example, the "model" for LaGuardia had changed little. But, the COO was now at a smaller company with very different "inputs" to the model.

So, what can we do to avoid these mental traps? Simply saying that we will be objective and look at data when making decisions won't do. Everyone says that and we still fall into the traps. Try this instead...
  • Ask people what they are thinking. Don't guess. Put customers, colleagues, or anyone else in a position to tell you honestly what they think. For example, this may involve a survey for large groups by a market research firm or a "360 review" of your colleague by a skilled third party.
  • Take time to make decisions. That means gathering the data you need and making sure that employees and managers have the time to properly evaluate options.
  • Put it in writing. When you force yourself to write it down, laying out the details of the situation and your decision with supporting analysis, you shine a light on areas where you may be ignoring information or are in need of more data. It is harder to skip over missing information when the hole is staring at you on paper.
  • Invite disagreement. By sharing your plans and inviting others to constructively poke holes in your thought process, you are more likely to expose the mind traps described earlier. These folks are still susceptible to anchoring, confirmation bias and all the rest, but they'll very likely take different forms than your own.

    Note as well that the more people you share your plans with and the more varied their job function, background, orientation, etc., the more likely you'll get to the truth. Had Kennedy's national security staff talked to real Russians, perhaps we wouldn't have had the Cuban Missile Crisis to begin with.
  • Define how to track success and failure at the outset. The more specific you can be at the beginning regarding signs of success and signs of failure, the less likely you are to succumb to bias, should your decisions go awry, as you will be staring at data that says your decision isn't working as intended. Once things get underway, we are all biased toward shaping the data in our favor.
  • Imbed all of the above with formal processes in your company. For example, when I worked at Kraft Foods many years ago, we redesigned the strategic planning process to force a focused review of objective data and had a series of internal reviews that made sure the plans were critiqued by a diverse group of people. Consensus was not an unwritten mandate of the process, but open review was.
There are lots of mind traps and I certainly have not covered all of them. Be wary of these five and guard yourself against them with humility, talking to a diverse group of people and putting processes in place.

Remember, research has shown that we all think we are smarter and better than we really are. It is human nature.

Heard on the Street

With the election cycle in full gear, there is lots of noise about stagnant middle class incomes. Various statistics are spouted to support this claim.

But, according to Martin Feldstein, Professor of Economics at Harvard University and President Emeritus of the National Bureau of Economic Research, middle class income has risen by 2.5% a year, after inflation, for the last 30 years!

And that doesn't even take into account new and often free products such as the internet, Google search and so forth. Read his short article here.

About Us

Goodrich & Associates is a management consulting firm. We specialize in helping our business clients solve urgent liquidity problems. Our Founder and Principal, Charlie Goodrich, holds an MBA in Finance from the University of Chicago and a Bachelor's Degree in Economics from the University of Virginia, and has over 30 years experience in this area.

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