Whichever side of the debate you were on in 2016’s various political earthquakes, the one thing all sides agree on is that we face unprecedented uncertainty in the year ahead.
Unfortunately for leaders, uncertainty causes many of us to make poor judgements, take greater risks and generally behave more irrationally than we otherwise would. Luckily, psychologists and economists alike have been studying the effects of uncertainty on decision-making and their findings provide leaders with some dangers to watch out for:
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 often notoriously bad at estimating probabilities and yet consistently confident in their ability to do so – a recipe for disaster when others look for confidence as a sign of competence. When uncertainty i.e. unpredictability, actually 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. Much has been made of the fact that the electorate here and in the US have opted for an uncertain and potentially riskier outcome over sticking with the status quo. 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. 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.
For leaders, countering these biases in themselves and their teams requires a robust commitment to understanding and managing common cognitive errors. Good judgement can be learned and practical skills such as strategic decision-making and predictive forecasting can be developed as part of your leadership repertoire. Moreover, recent research suggests, perhaps counter-intuitively, that uncertainty can also lead to increased motivation, so there are tools available to leaders that can help navigate, and prosper from, uncertainty.