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Why We Make Bad Decisions

Many of us have wondered exactly why we make bad decisions. We are educated and we understand cause and effect of our actions, yet somehow we fall right into the same traps over and over again. As with many things in our society today, we look for specific reasons as to why we make poor decisions. And right on cue, psychologists have discovered and identified phenomena that are influencing the way in which people are making their daily decisions. So whenever we understand the inner workings of these phenomena, it provides tools that will make us much more aware of the traps we tend to fall into when we make terrible decisions.

Ambiguous Effect

ambiguity effectThe ambiguous effect is something that affects our decision-making process based on how we view the outcome. The way it works that is when we are offered choices and we know in advance what the outcome will be for one of the choices and not the others, then we end up picking the option that we can forecast – regardless of how rewarding any of the other choices could be.

A study that was conducted by the University of Pennsylvania along with the University of Oregon, subjects were requested to play games by pulling colored balls out of a container and were able to win some cash based on which balls were drawn. In one test, they were offered a jar that contained 30 red balls along with 60 other balls that were either yellow or black.

The game went like this: a single ball was drawn from the jar, and based on the choice and the ball’s color, these people could win money. Most of these participants placed their wager on red balls simply because they already knew how many of them were inside the jar. This was in spite of the fact that the jar could’ve had up to 60 yellow balls or 60 black balls.

Because so many things in our lives are unclear, it is this factor that influences us to not take any chances. We tend to go with sure bets that provide predictable low returns when it comes to things like investing. Yet the big winners tend to be the unknown investments that we steer clear of because they are a bit volatile. In this case, fear may be why we make bad decisions.

The IKEA Effect

ikea effectCheck out this scenario: Your mother spends weeks making for you a nice sweater for your birthday. Then when you open the gift, she is very hurt with your low energy reaction. Actually, this scenario is very common – and it is known as the “IKEA effect.”

This effect refers to the notion that we all place a much higher value on things that we have made or put together ourselves—to the point that of not seeing its flaws and imperfections. We have the tendency to give these items more value than things that are professionally made. This is because the entire process of building or creating things is not just a labor of love; it is also display of our skills and abilities. Those who’ve experienced more ridicule than others, tend to put even more value on their own creations.

Unfortunately, we all become victims of this phenomenon quite often, especially when it comes to ideas. This is why your boss decides to go with his horrible idea (that no one really likes) instead of a great idea from one of his subordinates. We see entire corporations and companies go bankrupt because of this IKEA effect. We see tens of thousands of people lose their jobs because no one has the backbone to tell the CEO how horrible their choices are. Not being willing to let go of ideas because we created them is another reason why we make bad decisions.

Clustering Illusion

clustering illusionThe “clustering illusion” is where people think they are seeing a pattern in things that are occurring randomly, even if there is no way in the world that a pattern could exist. Gamblers tend to fall victim to this illusion as they play games of chance.

This clustering illusion can also occur in a spatial observation. During World War II, people who were living in London had no clue if bombings were occurring randomly or not. Whenever they looked at maps that indicated where the bombings took place in big clusters within certain areas, while other areas saw no bombs at all, many were sure that the Germans were purposely avoiding certain areas in the city for a variety of reasons. Later, it was learned that these attack clusters occurring in certain areas were totally random.

The fact is that we humans are terrible at determining whether something is random or not. Therefore, we really should not engage in trying to find patterns within random events because this is another reason why we make bad decisions.

The Decoy Effect

the decoy effectOften times, whenever we are faced with choosing from three different things, our final choice could actually have more to do with the choices we didn’t choose – rather than what our final choice was.

To make a conclusion about third candidates in political elections, the Washington Post examined this in regards to the decoy effect. The two front-runners during elections could do more for themselves by drawing attention to that third candidate rather than lashing it out against one another. But this decoy effect does not only apply to elections.

Suppose you are trying to choose between two different restaurants. The first one has great food, but it is long drive to get there. The second restaurant is much closer, but their food is not as good as the other. It can be a hard choice until you add a third option—which is a restaurant that has bad food at a distance that lies between the other two restaurants. As you measure the first two choices against the new third choice, you instantly see that it totally changes the decision. At first, the question was whether or not the quality of food was more important than how far you had to drive to get it. Now the choice becomes which of the three restaurants is better than the other two – and this makes the closest restaurant the obvious selection.  It has much better food than the third restaurant that is located in the middle, and is far more convenient than the restaurant that is located the furthest away – so it beat both of the other two choices.

This is exactly why third options don’t always have the kind of impact that we would think. Whenever we have two front runners that people have to choose between, a third option is often used to make people unconsciously measure against the others. This third option tends to make people focus on their option instead of what they really care about and is another reason why we make bad decisions.

The Hot-Cold Empathy Gap

hot cold empathy gapIt happens to us all the time. We stop by the store for a snack, but we end up leaving there with a couple of grocery bags full of food. Instead of spending five or ten dollars, we spent forty or fifty dollars.

We could say that is what we get for shopping while being hungry, and that would be partly correct. But it happens because of something known as the hot-cold empathy gap. A cold state is described as feeling neutral, but a hot state is when we experience more urgent feelings like pain, fear, and hunger.

In the previous grocery store example, it was a case of a potential empathy gap, or attempting to make choices that are totally based on our anticipated state of mind. Likewise, there are things known as a retrospective empathy gap, such as looking back on a boozy night from the past and not believing that we shared deep secrets with a person we hardly knew.

There are also the things known as interpersonal hot-cold empathy gaps, which occur whenever we are unable to see things from another person’s perspective because they are not in the same physical state that we are presently in. One interesting study examined two separate groups of people; one of these groups had just completed their workout, while the other group was preparing to start theirs. This was when both groups were told a news story about a hiker that was lost and had no water or food. The group who just completed their workout and was thirty felt that having no water was the biggest problem the lost hiker was facing – as they were in that thirsty state at the time.

This gap also causes parents to misunderstand the needs of their children as well. This explains why so many parents either over-dress or under-dress their children for the weather. Or when they do not relate to a child’s anxiety about monsters possibly hiding under their beds. Children view the world much differently than adults and grown-ups are quick to forget about this. Such a disparity of world views is a likely reason why we make bad decisions.

The Time Saving Bias

time saving biasWe can all rationalize in our minds that if we drive faster, we reach our destination sooner. The fact is that this will not necessarily happen; reality is a lot more complex than this. There are countless psychological studies out there that have reveal how poor humans are at judging distance, time, speed, and how they interrelate.

The time-bias theory claims that when we travel at reasonable, relatively low speeds and discover that we are going to be late, then we speed up. The problem lies in the fact that people tend to badly underestimate the amount of time they will save by going just a little faster. This error will drastically change when people are already traveling at fast rates of speed. When people speed up and they are already going fast, people tend to grossly overestimate the amount of time they will save. When we poorly estimate times like this, it is understandable why we make bad decisions.

In one such study, people drove the same route a number of times. For the first trial, they traveled at 19 mph. Then they repeated the route and were asked to finish the drive 3 minutes earlier. Then, a second set of participants drove the same route at 62 mph, and were also asked to repeat the drive 3 minutes faster than their first drive. The first group who drove at slower speeds saved around 6 minutes on average, then the second group who drove faster only saved 2 minutes on average – thus proving the time-bias theory, which is another reason why we make bad decisions.

The Dunning-Kruger Effect

dunning-kruger-effectThe Dunning-Kruger effect is a remarkable phenomenon that examines knowledge—or more specifically, it evaluates the knowledge that people think they have. According to the famous psychologist David Dunning along with his graduate student named Justin Kruger, there is a point where total incompetence in a person is transformed into total belief in their own ability.

This effect is very noticeable in particular groups of people who tend to pride themselves on how well they have mastered their own fields. Often times, whenever we look under the hood with these kinds of people, we discover that they are not as knowledgeable as they would have us believe. In fact, many times we discover the exact opposite to be true – they are actually incompetent in their chosen fields. This illustrates a very sad truth about society – many incompetent people do not even know that they are incompetent. They actually believe they certainly know what they are doing and believe they are very skilled at it.

Many experts believe that possessing this type of confident ignorance emanates from a person having these thoughts planted in their minds when they were very young. While traditional schooling will purge many ideas from a person’s mind, other kinds of ideas may not be addressed at all. It is not a common thing for children to be told that they suck at coloring and they will never become an artist. So it is plausible for kids to believe with all their heart that they really are great singers, talented poets, or future best-selling novelists, simply because no one ever told them any differently.

Dunning claims that everyone suffers from the Dunning-Kruger effect to an extent. All of us have blind spots and are completely ignorant about one thing or another. And there is a pretty good chance that we do not even know where the gaps are in our own personal library of knowledge – even though it is painfully obvious to everyone else. Not understanding the limits of our intelligence is often a reason why we make bad decisions.

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