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Avoiding poor decision making during periods of uncertainty

Kiddy & Partners

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Leading through uncertainty has been a key leadership skill for some time, but Covid-19 will be the biggest test yet for many leaders.

Unfortunately, uncertainty can cause leaders to make poor judgements, take greater risks and generally behave more irrationally than they otherwise would (1).  Luckily, psychologists and economists alike have been studying the effects of uncertainty on decision-making and their findings provide leaders with three main watch-outs:

Uncertainty breeds overconfidence

Almost all of us overestimate our ability to predict future outcomes, but when it comes to making business decisions these forecasting errors can have catastrophic consequences. Individuals are notoriously bad at estimating probabilities (2) and yet are consistently confident in their ability to do so – a recipe for disaster when others take confidence as a sign of competence. When uncertainty increases, the risk is amplified. 

Uncertainty encourages risk-taking

Research has shown that under conditions of uncertainty, individuals go to extraordinary lengths to avoid incurring losses, even if this means taking an even greater gamble on the unknown (3). back in 2016, the UK opted for Brexit, an option which was far more uncertain and presented potentially riskier outcomes than sticking with the status quo and remaining in the EU. For business leaders, the threat of loss in an uncertain future encourages riskier decision-making and a greater willingness to gamble at precisely the time when such risks are most difficult to mitigate against.

Uncertainty incites short-term thinking

Individuals are predisposed to prioritise the present over an unknown future and we often ‘discount’ future gains in a way that is inconsistent; for example, choosing a smaller immediate reward over a larger payoff at a later date (4). Uncertainty exacerbates this tendency so most leaders will too often find themselves tempted to focus on short-term goals at the expense of longer-term priorities.

What can be done to mitigate these risks? 

For leaders, countering these biases in their own decision-making and within their teams requires a robust commitment to understanding and managing common cognitive errors. Good judgement can be learned; practical skills such as strategic decision-making and predictive forecasting can be developed as part of your leadership repertoire. Interventions, such as the Leadership Development Programme we implemented with a leading Insurance firm, can help leaders develop their awareness of the risks when leading through uncertainty and provide them with the skillsets to mitigate these. 

Self-awareness can also be built through providing leaders with insight into their strengths and development areas as observed through a robust leadership assessment process. In-depth assessment of a leader’s capabilities, development areas or strengths that are at risk of being overplayed, is essential for supporting leaders that are operating under challenging conditions where the impact of such limitations may be amplified. 

While uncertain environments present heightened challenges in leadership, research suggests, perhaps counter-intuitively, that uncertainty can also lead to increased enjoyment of a completing a task and therefore motivation (5). With the right support and tools leaders can navigate, and prosper from, uncertainty.

References: 

[1] Frisch, D., & Baron, J. (1988). Ambiguity and rationality. Journal of Behavioral Decision Making, 1(3), 149-157.

[2] Harris, A. J., Corner, A., & Hahn, U. (2009). Estimating the probability of negative events. Cognition, 110(1), 51-64.

[3]Levy, J. S. (1996). Loss aversion, framing, and bargaining: The implications of prospect theory for international conflict. International Political Science Review, 17(2), 179-195.

[4] https://pr.princeton.edu/news/04/q4/1014-brain.htm

[5] Abuhamdeh, S., Csikszentmihalyi, M., & Jalal, B. (2015). Enjoying the possibility of defeat: Outcome uncertainty, suspense, and intrinsic motivation. Motivation and Emotion, 39(1), 1-10.

More information

For more information regarding the challenges of leadership in response to COVID-19, please see how Kiddy & Partners can help you and your business.

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