Factors Influencing Key Employees Decisions-making by Andrea Hottleman

Business owners either rely on themselves or key employees for important decisions within their companies. Behavioral finance looks at the way emotions and psychology influence attitudes and beliefs in decision-making.

Examples of emotional and psychological influences are when decisions are made based on a trend that a person believes to exist but does not; or a feeling that a person has control over events when they do not.

Psychologists have broken the factors that influence the interpretation of data into the following areas: anchor effect, overreaction to random occurrences, overconfidence, optimism, follow the herd, loss aversion and the endowment effect.

Anchor effect occurs when more weight is given to the initial information received on a subject. This happens more often when the information is shared with others and it agrees with the key employee or owner’s point of view.

Overreaction to random occurrence happens when we create a relationship that does not exist based on data results. People tend to look for systematic patterns but sometimes these patterns are actually random.

Overconfidence results in mistakes of significant size. People tend to overestimate their abilities and knowledge.

Optimism is when a person underestimates a poor outcome. A few optimistic decisions put together could result in an overly positive financial forecast.

Follow the Herd provides a false sense of not being alone. A decision made based on the way the company has always done it or the way others in the company would agree with. The employee may not feel comfortable stepping outside the box for fear of failure.

Loss Aversion can hinder the growth of a company. Sometimes it may take a small loss first to take a giant step forward.

Endowment Effect is human nature to value an item they own higher than it is actually worth. For example, ask someone how much their house is worth?

Understanding the psychology behind decision making will help you to understand the management styles and decisions at work in your organization. Avoiding these psychological pit falls can be achieved by implementing a strong network of checks and balances within the company’s internal control structure. An organization’s internal controls should be evaluated annually.