Are You Making Business Decisions with Blinders On?

If you’re a typical business owner, you’re probably making some of your most important decisions with blinders on. It’s not unusual. Yet you probably feel like most entrepreneurs: smart and savvy, especially if your business results have been growing.

But it only takes one serious mistake to see all those profits go down the drain faster than a bad bet at the racetrack. Bad business decisions are so common they have names. Here’s a classic one: decisions made with bounded awareness.

The phenomenon of bounded awareness is when cognitive blinders prevent a person from seeing, seeking, using, or sharing highly relevant, easily accessible, and readily perceivable information during the decision-making process.

I see this in one of my smart but stubborn clients right now. When he talks to one or two experts in the area he’s trying to make a decision, if they don’t give him the answer he wants, he seeks out anybody who will, regardless of whether they have any expertise or not.

Also, he’ll come up with these ancillary reasons to justify what he wants, giving minor points major weight to rationalize what he wants. He doesn’t so much seek advice as he seeks approval and confirmation. The problem is he relies on his past successes combined with unbridled optimism, rather than reality. He’s been lucky, yes. And, I keep telling him, there’s a better way to plan for success.

Most entrepreneurs I know don’t make life and death decisions like big pharmaceutical companies have to. Here’s an example of a bad decision on a dangerious scale.

According to a January 2006 article in Harvard Business Review titled Decisions without Blinders by Max H. Bazerman and Dolly Chugh, by the time Merck withdrew Vioxx from the market in September 2004 out of concern that the pain relief drug was causing heart attacks and strokes, more than 100 million prescriptions for it had been filled in the United States alone. Researchers now estimate that Vioxx may have been associated with as many as 25,000 heart attacks and strokes. And more than 1,000 claims have been filed against the company.

Social science research has shown that without realizing it, decision makers ignore certain critical information. Doctors, like the rest of us, are imperfect information processors.

Most executives and business owners are not aware of the specific ways in which their awareness is limited. And failure to recognize those limitations can have grave consequences, as the Vioxx example demonstrates.

Bounded awareness can occur at various points in the decision-making process.

  1. Executives fail to see or seek out key information needed to make a sound decision.
  2. They fail to use the information that they do see because they aren’t aware of its relevance.
  3. Or, executives fail to share information with others, thereby bounding the organization’s awareness.

It’s more common than we’d like to believe; some people are actually seeking approval rather than advice when they ask for others’ opinions on proposed decisions.

Think about this, and review your last big decision. Did you seek out contrary opinions and disconfirming evidence? People don’t intuitively do this.

In my next post I’ll suggest some tips for insuring you don’t fall into the trap of bounded awareness and other decision errors.