Decision making in times of uncertainty (Stanford)

A newly published Insight from Stanford Business School tells us something we probably already know: high levels of uncertainty make us less likely to take risks.

Researchers found that when faced with a choice between losing $100 or taking a 50% risk of losing $200, most people chose the certainty of the smaller loss. Similarly, when faced with the choice of being given $100 or taking a 50% risk of gaining $200, most people chose the guaranteed $100. “People,” the researchers explained, “really don’t like the complexity and cognitive load of making decisions under uncertain circumstances.”

“People don’t like the complexity and cognitive load of making decisions under uncertain circumstances.”

For businesses living through a time of change and uncertainty this brings two problems.

The first is that when business leaders are asked to make a choice under uncertain circumstances (which increasingly is all of the time) they are likely to to be biased towards what seem the more certain outcomes, simply to reduce their ‘cognitive load’. This reduces their ability to see the opportunities that will be emerging in a time of change.

The second problem is that during times of change the options that seem to be ‘safe’ are not guaranteed at all. These are options that fit with the way the world used to work, but in a time of change that is not the way the world works now or the way it is going work in future. The safe options are not as safe as we think.

This means that because “People don’t like making decisions under uncertain circumstances,” businesses are likely to miss out on their opportunities and increase their risks. (And history is filled with examples of incumbent businesses whose leaders could not see the opportunities offered by a new (uncertain) technology but could only see the ‘guaranteed’ incomes that would come if they kept on doing things the same old way.)

Solutions:

There are three steps we can take to address this inherent, human bias.

First, we can enable leaders manage the levels of discomfort they feel when living in a time of uncertainty and to make clearer, calmer sense of the situations they face. The tools of Chapters 1 and 2 of Inner Leadership enable this.

Second, we can help leaders to find the opportunities in any situation and choose the best way forward. Chapters 3 and 4 provide tools for doing this. There are always ten types of opportunity in any situation and simply listing them will help put the leader back in control. It also increases productivity and morale.

Third, we need to describe the chosen way forward in ways that will inspire us and other people to want to make it happen. Chapters 6 and 7 provide tools and frameworks for achieving this.

Human beings have an inherent bias towards avoiding risk during times of uncertainty. By using these tools to overcome that bias we reduce the risk to the business and increase its opportunities. We also reduce people’s stress and increase their enthusiasm.


Photo By Dean Hochman via StockPholio.net

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