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Three Cognitive Biases That Cost You Money, Stress, and Happiness

Three Cognitive Biases That Cost You Money, Stress, and Happiness

Lets start with a simple question: how many of each animal did Moses take into the ark? If you pounced with the answer “2,” you have fallen into the same trap as most people. (The answer is zero—figure the rest out yourself.) Cognitive biases tell us we know when we don’t, create absurdly optimistic estimates of what we can achieve, and keep us stuck in bad relationships and bad jobs.

Here are three biases and some strategies for getting out of the trap they set.

1. The Sunk Cost Fallacy

Imagine you have a ticket to the movies for which you forked out 10 bucks, but you are attending with a friend who got hers for free.  The weather turns sour and they are re-running Dukes of Hazard.  Which one of you is more likely to cancel?  If you say “my friend, duh,” you are trapped by the sunk cost fallacy.

Your ten bucks is gone (assuming you can’t plead a refund).  Since you are out ten bucks whether you go or not, it should not affect your choice.  What matters is the cost-benefit of braving the weather, and whether your movie features more interesting characters than Boss Hogg. (Unlikely. Still.)

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The sunk cost fallacy traps people in bad relationships, bad investments, and traps countries in destructive, no-win wars.  (“We can’t withdraw because we have spent billions and people have given their lives.”)  What matters is the future—whether you can turn the relationship around, or whether the next billion dollars and young lives will be squandered in vain.

The sunk-cost fallacy is an example of a cognitive bias—a habitual, predictable, way of thinking that leads to error.  Wiki lists over 100; it seems the amazing human brain has many hard-wired flaws.

Some of these flaws may have conferred an evolutionary advantage.  Who knows what the exact conditions were five thousand years ago, but the hard-wiring of our brains may not have changed quickly enough to keep up with the white-heat of cultural and technological evolution that has happened in the last 5000 years (a blink of an eye in genetic evolution).

Conquering the sunk-cost fallacy is very tough.  Who has not poured time and money into something and wished they hadn’t, only to pour more in on the next occasion?  We like to self-justify (to believe that we made good decisions in the past); who likes to say “I was a fool then”?  Then, we look for confirming evidence things are going our way.  “He stopped drinking for a week, and had a job last year.”

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One technique is to create an imaginary scenario.  Imagine you parachuted into the (house, relationship, investment) for free, with nothing invested.  What would you do then?  If the answer is “run for the hills,” then you have your answer.

2. The Planning Fallacy

A second bias which causes enormous stress is the “planning fallacy.”  Humans suck at estimating how long things will take. Partly, we like to believe we are super-human, but mostly we are deluded about how complex things get.  As a writer, I’m constantly amazed that the last 5% of a project takes 30% of the time.  The average overrun on big technology projects is 27%, and many really big ones overrun by one hundred percent or more!  A group of students were asked to estimate how long a term paper would take, their “best case” guess was 29 days, and the “worse case” (excrement hits the fan) was 48 days.  They took an average of 55 days!

tough decisions

    How much stress and misery, I wonder, comes from people in offices saying “I can do it by Friday,” only to find that a couple of more Fridays are required?  We like to people-please, and to look confident and competent, but we are incompetent at estimating how long things take!

    3. Optimism Bias

    Our final bias rears its head in conflict situations, where everyone is sure of their “facts” and confident in their predictions about how different actions will pan out.  This family of biases means we take a rosy view of our knowledge, and a dim view of other’s.  Nobody is as right as they think they are.

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    Professor Philip Tetlock has studied expert predictions over a lifetime.  He found that experts (real experts, not talk radio experts) who were 100% sure of an outcome were wrong 25% of the time.  Further, when they thought an outcome had “no chance,” it happened 15% of the time.  What percentage of people are above average listeners?  96%!

    This “confidence without competence” is one cause of conflict running out of control.  People who are dogmatically sure of themselves beget adversaries who become similarly dogmatic. The next time you are in a conflict situation, make a table with two columns; write the facts (as you see them) in one column, and your opinions and conclusions in the other column. Ask your adversary to do the same (nicely!).  Check off the facts on which you agree, and where you disagree. Do some homework together.

    The difficult part of resolving conflict lies in the area of opinions, interpretations, values and predictions, so you are only part of the way there.  But going through the process of developing a shared set of facts will diminish the polarization, and allow you to get down to business.

    Learning about our biases can help.

    The sunk-cost fallacy keeps us stuck in a miserable past, throwing good time and money away after bad decisions. The planning fallacy creates tremendous stress as we struggle to meet unrealistic deadlines. Optimism biases make us feel sure of ourselves when we have no right to be, which leads us to prolong and exacerbate conflict.

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    We didn’t learn these things in school because they were not well understood, were not part of any college curricula (unless behavioral economics gives you jollies), and certainly far from mainstream understandings of how humans work.

    Learning about our biases puts us back in the game.  Like sharpshooters who correct for wind velocity and direction, knowing our thinking is skewed in a particular direction means we can auto-correct, make better decisions, and get more of what we want in life.

    More by this author

    Cognitive biases and decisions Three Cognitive Biases That Cost You Money, Stress, and Happiness Three things a skeptic should know about neuroscience Forget Resolutions: If You Only Do One Thing to Get Ready for 2014, Do This!

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    Last Updated on December 5, 2018

    How to Lead a Team More Effectively and Be a True Leader at Work

    How to Lead a Team More Effectively and Be a True Leader at Work

    Being an efficient manager and a charismatic boss at the same time can seem like an impossible task. Is there a way to deliver the desired results for your business while remaining liked and respected by your staff?

    We all know bad examples of team leaders who seem to fail at one aspect or the other, or even at both. But we’ve also heard of awesome managers who seem to juggle both things well enough.

    How do they do it?

    By sticking to few proven ways that let them maintain a positive karma score while remaining efficient. In this article, we’ll guide you through 11 smart management tips on how to lead a team and become something more than a boss – a leader.

    1. Find a Management Strategy and Stick to It

    There’s nothing worse than a boss that keeps changing his or her opinions and assignments depending on their mood or a book they read this week. Chaotic decisions increase the insecurity and frustration of your team, so you better find your strategy and stick to it.

    If you do find some new methods you want your staff to follow, make sure they don’t contradict the general direction you are taking. Otherwise, you risk making your team take one step forward and two steps back.

    2. Set Goals​ and Track Progress in Reaching Them

    Set individual and collective goals​ for your team and track the progress in reaching them. This might sound obvious at first, but too often we find ourselves stuck between daily customer requests and monthly reports, and the bigger goal or vision seems to fade away.

    According to Elon Musk (and many other successful CEOs around the Globe), it’s crucial to have a clear and motivating aim to where the company is heading. His aim for the space transportation company SpaceX is “to make humankind a multi-planetary species”.[1] That’s a huge goal but the company is slowly moving closer to it by reaching smaller steps and milestones, like launching self-landing rockets. This is also a very inspiring and meaningful goal that helps employees endure the company’s extremely high expectations and 60 to 70-hour work weeks.[2]

    Even if your goals are not as grand, setting and reaching milestones will give you a clear insight into the team’s overall efficiency and daily progress. With time, you will be able to see the weak spots and improve your results.​

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    3. Demand Learning from Your Team

    CEO of print on demand startup Printful, Davis Siksnans, believes that:[3]

    “The key for a company going through rapid growth is to empower your employees’ self-development.”

    His company with 500 employees spanning two continents demands a culture of learning and provides all the tools necessary to do it.

    Their idea is –  as the company scales, people have to grow in their positions too, which means that they have to be constantly learning. Siksnans says:

    “We try to hire people for what they might become, but they need to have that drive.“

    Alternatively, you can provide educational courses for your employees or invite informal lecturers to educate and inspire your team. You can also encourage peer-to-peer learning by asking employees to teach their particular experience or skill to co-workers.

    4. Invest in a Pleasant Work Environment

    Studies show that a well-designed office environment can increase your team’s overall performance by as much as 20%. You’ll be surprised to see that even very small interior tweaks that don’t require major investments can improve your workers’ performance.

    Some ideas for a more productive and pleasing work environment:

    • Invest in modern furniture – offer ergonomic chairs, standing desks, and individually arranged workplaces​.
    • Start an in-house library – reading for pleasure just 30 minutes a day is proven to be enough to become more effective at work,[4] improve focus, and deal with problems like depression and anxiety.​
    • Play jazzy office music – rhythmic background music will help workers feel more energetic and enthusiastic while doing everyday tasks.​
    • Set up entertainment or break rooms – being able to relax and have fun at work creates a strong commitment, helps employees relax and clear their minds, and boosts productivity.​
    • Bring in uplifting office decor – it’s been found that art in the workplace can boost productivity,[5] lower stress, and even encourage employees to innovate.​
    • Decorate the office with live plants for freshness and a welcoming feel. Furthermore, plants are found to ensure better air quality and increase workers’ productivity by 15%.[6]

    5. Be Kind and Sincere to Your Team

    Did you know that 50% of employees quit because they dislike working with their manager?[7] In fact, most times when people leave their jobs they actually leave their managers. Being friendly and sincere may not be enough to be a successful manager, but it’s a big part of it.

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    Some ways to show you appreciate and care for your staff:

    • Celebrate the progress and achievements of your employees. And don’t be shy to simply say thanks.​
    • Talk to your employees regularly and really listen to what they have to say. Address their concerns, help them reach their goals and do your best to improve their work and daily life.
    • If you’re having a bad day, don’t pour out your stress and anger on the staff. Instead, try to recharge yourself by appreciating the achievements of your team and setting the next goals.
    • Try not to overload your team with work. Every company has rush periods when it’s okay to have more work than usual. But remember that people cannot work under prolonged pressure and stress.
    • Don’t be selfish – it can be very demotivating to see that the manager only focuses on what you can do for him and doesn’t care about your goals and well-being.​ As the CEO of Xerox Anne M. Mulcahy put it,[8]

      “Employees who believe that management is concerned about them as a whole person — not just an employee — are more productive, more satisfied, more fulfilled.”

    Whenever you are having doubts about your kind attitude, remember – satisfied employees are productive employees which lead to satisfied customers and eventually – success for your company.

    6. Offer Flexible Work Hours

    The traditional Monday to Friday, 9 to 5 job is beginning to slip away. Increasingly more people are working remotely or having flexible work hours, and we can expect this trend to continue. To adapt to these changing habits and remain competitive in the labor market, more employers are offering the chance to choose your own work hours, work from home or even from another city or country.

    Offering flexible hours is a powerful way to inspire your existing staff and give them intrinsic motivation. Why not let your employees choose their preferred working hours while keeping the 8-hour day? For example, night owls are unhappy and unproductive if they have to come to work before 10 AM, while others might prefer to start at 7 and finish earlier.

    You can go even farther and hire remote workers – this way you’ll be able to recruit from a global talent pool and even save money on office expenses like desks, stationery, electricity, etc.[9]

    7. Track Your Team’s Productive Time

    Not monitoring your employees’ progress and efficiency can result in poor performance and slacking. Instead of letting things go with the flow, you should consider installing time-tracking software on your employees’ computers and see who’s doing great and who might need a productivity boost.

    But don’t get it wrong – there’s no need to become big brother and watch every step your employees take. If you use the time-tracker as a spying tool, you will only see increasing suspicion and insecurity around you, and your employees’ happiness levels will drop.

    On the contrary, choose software that allows employees to mark private time that won’t be tracked. In addition, consider these time-management tactics:

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    • Allow flexible work hours. (see Tip No 6)
    • Encourage breaks – studies show that employees who take regular breaks are more productive than those who don’t.[10]
    • Enable remote work to show your employees that you trust them and that they can work from home or even from another country (if they can maintain sufficient productivity).
    • Consider offering bonuses to your most productive employees (those who show productivity levels above 90 or 95%).

    8. Use Only Constructive Criticism

    Constructive criticism means offering valid and rational opinions about the work of others, involving both positive comments and remarks about what should be improved. Constructive criticism is usually expressed in a friendly manner rather than an oppositional one.

    When you evaluate your team’s work, give them feedback that’s helpful, specific, and sincere. Don’t be shy to praise, but also be direct and even strict when necessary.

    9. Don’t Give Special Treatment to Yourself

    The boss’s actions are – directly or indirectly – observed by your team. This means that your employees look up to you and often mimic your attitude towards your work and the company – especially if your actions don’t show commitment. Nobody wants to work for a leader who doesn’t go all in or inspire motivation.

    What you should do is lead by example. If you expect your employees to arrive at work on time and work 8 hours, do the same yourself. If you want them to show initiative, show it yourself and encourage others to do the same.

    Jeff Weiner is the CEO of LinkedIn – a company of 3,000 employees that consistently ranks as one of the best workplaces with a 92 percent employee-approval rating.[11] Weiner’s workdays are reported to be equally long or even longer than those of his employees, allowing him to stay “extremely credible as a leader.”

    10. Empower Your Employees

    Here’s a common mistake many managers make:

    They don’t motivate their staff and assume they simply love to work for their company.​ Such belief can result in painful losses for the company – especially these days when many companies are in desperate need of a reliable workforce.

    Instead of directly thinking about bonuses and perks, consider intrinsic motivation. For example, enable flat organization in your team and listen to your employees’ ideas when they come up with opinions and suggestions. Your company might actually benefit a great deal from the feedback, and the unique ideas employees come up with.

    You can also start an initiative where employees can freely share or pitch their business ideas to you or the founders of the company. If the idea is accepted by the management, the project can be developed, and the employee can have equity options.

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    If people feel they have an impact in the company, they become more motivated, engaged and interested in the company’s growth.

    11. Nurture Your Company Culture

    Company culture is the personality of a company that defines the overall work environment and relationships between teammates. It also includes company mission, values, ethics, and goals.

    Some examples of company cultures are the Horizontal corporate culture (collaborative and equal; popular among startups and free-spirited businesses) and Conventional corporate culture (a more risk-averse and hierarchy-based approach common in traditional companies).

    However, you don’t have to stick to pre-existing boxes when creating your corporate culture. You might think of your team as a family, a sports team, or even a hippie camp if it fits your business and purpose. But keep in mind that by the time a company’s size reaches 20 employees, the company culture is set,[12] and any changes will need to be implemented in smaller teams.

    Whichever personality you choose for your company, make sure to live by it and nurture it. Some things that might help:

    Team building events, relevant books in your office library and proper on-boarding for the new employees to get everyone on the same page from the very beginning.

    Be a Leader, Not a Boss

    Using the words of Printful’s CEO Davis Siksnans, the ultimate goal is to “Hire great people who don’t have to be managed.”

    However, when you do need to demonstrate some initiative and control, act as a leader rather than as a boss.

    In other words, don’t be afraid to show the personality behind your role. And keep these 11 tips close to your heart.

    Featured photo credit: rawpixel via unsplash.com

    Reference

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