Every day people make decisions; some are very simple and therefore unconsciously made, and some involve a lengthy process of evaluating and comparing options before making a choice. Whether making a simple decision or a complex one, we are not as rational as we tend to believe, and these decisions are often made based on emotions and influenced by our unconscious biases. These biases influence our everyday actions and are, by nature, unnoticed by us. They are shaped by our cultural norms and experiences and allow us to quickly filter information to make decisions. This is where trusting your gut and gut reactions come from – however they can sometimes lead us to make the wrong decisions and misjudge situations. Accepting that your gut feelings may be wrong is very difficult to do, but is necessary to guard against common biases if you want to make the best decisions possible.
These unconscious biases are present in our daily routines but they also represent a significant business risk. Commonly associated with situations and decisions involving people - such as during the hiring process or when forging new partnerships - they also affect decisions that involve making large investments, like purchasing new accounting ERP software. These types of decisions are often influenced by emotions and biases - more so than most people tend to realize - and can negatively impact a business if not properly addressed. Examples of these biases are outlined below.
Hyperbolic Discounting
Hyperbolic discounting is the tendency for people to want an immediate pay-off rather than a large gain later on. This can apply to business owners who would rather spend less money on an easy to implement software solution than put an investment into a system that takes longer to implement but can provide them with benefits long into the future. This is why it is so important for companies to begin evaluating sophisticated software solutions while their current system is able to manage their business processes and so the need is not as immediate. The focus should be given to a system that provides a high ROI over a longer period of time, even if the pay-off will not be as immediate.
Irrational Escalation
Irrational escalation occurs when you invest more money or resources into something based on prior investment, even if you know it’s a bad one. It is common to see companies continuously invest in outdated and corrupt software because they have had it in place for so long and have already made a large initial investment. This thought process ignores the fact that additional costs will continue to add up while benefits derived will continue to decrease. For example, this may include a company hiring more people to work on an old and outdated system, or spending the money on support and customization to create workarounds when the software does not perform as is supposed to or in accordance with your processes.
Omission Bias
Omission bias is the tendency to judge harmful actions as worse than equally harmful inactions. For example, this could be a company avoiding the work involved in getting a new accounting and ERP system, even though not getting a new system involves more daily workarounds. The investment of time and resources to implement a new and better solution seems to outweigh the investment of resources and time to maintain an existing system - even though this is flawed thinking. Not taking action on replacing outdated systems and creating more work with manual processes and workarounds will be more harmful to the company in the long run, than spending the time implementing a more sophisticated solution.
Recency
Recency is the tendency to weigh the latest information more heavily than older data. This is a common problem during the software demo stage of the software search. If you view too many demo's in a row, then your natural bias is to weigh the value of the more recent one more heavily than any of the others. Recognizing that this bias exists is the first step in overcoming it and keeping careful notes on each demo, and spreading them out over a few days can also help eliminate this bias.
Making a decision as big as implementing new accounting software is a lot of work in and of itself – planning ahead with a search strategy and recognizing unconscious biases that may influence your decision can greatly aid in the process.
For more information on the above and other common biases visit: http://www.businessinsider.com/cognitive-biases-2013-8
