Business Psychology - Latest Findings

Article No. 273
Business Practice Findings, by James Larsen, Ph.D.

Deciding with your Emotions

New research reveals a weakness in decision making.

Consider the following three situations and guess what they have in common.

    1. Your elderly parents both develop coronary artery disease and their doctor recommends that they undergo bypass surgery. Your father decides to go first, but the outcome is disappointing.

    2. A distant great aunt passes away and leaves you $20,000 in her will and you decide to invest the money. After careful research, you decide to buy stock in two big oil companies. You divide the money and buy 200 shares of the first company, ExxonMobile, but by the end of the day, your stock in this company has lost a dollar a share.

    3. Your retail business is making money so you decide to invest in an expansion. After careful study, you select two locations for branch stores, but you concentrate on one store at a time. Unfortunately, the first expansion store disappoints you. Walk-in traffic and gross sales at the end of the first week are well below your hopes.

In all three situations, an initial choice turns out to be disappointing and throws the decision maker into a dilemma: Should the mother reject the bypass surgery for herself? Should the investor look for a different kind of investment? Should the retailer go ahead with his plans for a second expansion store?

Whenever choices can not provide a guaranteed outcome, the best one can do is to choose carefully and to prepare for disappointments. Unfortunately, recent research by Rebecca Ratner, from the University of North Carolina at Chapel Hill, shows that most people fall down badly on the second step in this process, preparing oneself for a disappointing outcome.

Professor Ratner conducted an experiment that placed people in investment situations. They were asked to chose between two brokers, one with a 54% probability of success and the other with a 43% probability of success. Most people chose the broker with the better record, but that choice turned out badly. Her subjects were told that the investments this broker chose lost 15% of their value.

Next, Professor Ratner repeated the experiment. She asked her subjects to choose again, and she limited them to these same two brokers. On this second decision, many of her subjects abandoned the broker with the higher probability of success and chose the poorer broker.

Professor Ratner believes that this experiment revealed the power of an emotion – regret – to interfere with logical decision making. People regretted the outcome of their initial decision, found themselves in a dilemma on the second trial, and then chose badly, selecting the poorer broker. She believes such bad choices are a common event.

For people who make decisions every day, this is not a good finding. It suggests that we have a problem making wise decisions when our emotions are aroused, especially the emotion of regret when it follows a disappointing outcome of a good decision.

Professor Ratner wanted to learn more, so she conducted three more experiments that explored factors that might impact this negative effect. For example, she worsened the effect by asking people to focus on their emotions just before selecting the second broker. She lessened the effect by asking people to review their beliefs about each broker’s probability of success before selecting again. Finally, she measured her subjects’ tendencies to think logically and found that logical people tended to chose the better broker in the second trial while emotional people chose the poorer one.

Professor Ratner believes we can control the power of regret by dampening emotional reactions to disappointing outcomes. She offer these suggestions:

    1. Consider the second decision before learning the outcome of the first. This focuses one’s attention on probabilities of success and away from emotional reactions.

    2. Defer learning the outcome of the first decision. A time delay dampens emotional reactions.

    3. Conduct dry runs. Repeat the initial decision many times without committing any resources to it. This gives you a history, a track record, which can place an occasional disappointing outcome in its proper perspective.

    4. Notice the outcomes of rejected alternatives. Regret often feeds upon the imagined positive outcomes of choices not made.

Making decisions is important and difficult work in business, and Professor Ratner’s work warns us of a significant threat to this work. But armed with an awareness of this threat and a few strategies to blunt its impact, we can make better decisions.

Reference: Ratner, Rebecca and Kenneth Herbst (2005) When Good Decisions have Bad Outcomes: The Impact of Affect on Switching Behavior. Organizational Behavior and Human Decision Processes, 96 (1), 25-37.

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