Better Business Through Better Judgment
Thursday, September 1, 2005; 2:30pm EST
The future success of your business hinges on the quality of the
decisions you make today. It�s not as critical to have good business
judgment as it is to avoid poor judgment. Average quality decisions
may slow growth, but it�s the mistakes that bring a business down.
There are two common judgment traps in particular to avoid:
Anchoring and Investment Traps.
The average home business has a 75% chance of success. What do you
estimate as your chance of success? What if I had told you the
average home business has a 25% chance of success? Does your
heavily influenced by �anchor� values. We use the anchor as a
starting point and then adjust our response around it, both
consciously and subconsciously. This process can be very helpful at
times. It provides a decision making short-cut by narrowing the
range so we don�t have to consider all possible values. The problem
occurs when anchors are misleading.
values can unjustly influence your perception of a fair price or a
good deal. This is very common in negotiations where the opening
side sets a starting point at a high or low extreme. They probably
don�t expect to get the extreme number, but it helps steer you
towards that end.
Most of us are on
the alert for this during formal negotiations. We are less aware of
anchors in other daily business decisions. For instance, what fee we
charge customers may be anchored in our start-up rate - that low
rate we offered when we had no clients and were anxious to attract
business. It�s time to reevaluate that anchor. What we decide is a
fair price to pay for supplies or equipment may be anchored in our
last purchase. It�s better to compare current market prices.
Computers aren�t the only item to have dropped in price over time.
The key to avoiding
anchor traps is to first recognize the influence an anchor is having
on your judgment. Remember, many times anchoring occurs at a
subconscious level. Once you�re actually conscious of the effect,
you can simply evaluate the anchor and determine its usefulness.
Joe Entrepreneur joined a professional organization six months ago
in hopes of networking for new customers. Joe paid a large initial
joining fee, monthly dues over the past six months, attended ten
meetings, and did a free guest speaker session for the group. It�s
gradually become clear though that the chances of gaining new
customers from this organization are very slim. Should Joe continue
paying monthly dues and actively finish out his annual membership or
end his membership immediately?
What if Cathy Entrepreneur was contemplating newly joining the same
organization? Should she invest money and time in this area?
Regardless of your
answer for Joe, it likely took some consideration on your part,
whereas an immediate �no way� should have come to mind with Cathy.
This is known as a sunk cost effect.
Once time, effort, and/or money are invested towards a goal we are
naturally reluctant to lose these �sunk costs�. This reluctance
keeps many of us in business situations that are no longer ideal, as
if by staying in the situation we can somehow justify or recoup our
investment. The larger our investment, the more determined we become
to stay the course. So when what started as a smart investment
devolves to something less desirable, we are very slow to cut our
losses and walk away.
The key to avoiding
investment traps is to reevaluate situations in the present, without
undue consideration given to past investment. Ask yourself: Would I
pursue this course of action if I was freshly presented the
opportunity today? Given this perspective, you might get rid of a
draining client, dump a losing investment, or drop an under
performing business pursuit. If you�re still reluctant to cut your
losses, remind yourself that time and money are limited resources.
You want to invest your resources where they can get the maximum
It�s said that better judgment comes from experience. Fortunately,
it doesn�t have to be your own experience. Anchoring and investment
traps have been identified and examined by academic researchers
extensively. Put this knowledge to use and it will vastly improve
the quality of your business decisions and ultimately increase the
success of your business.
About the Author
About the Author: Kimberly Merriman is a business writer and educator
based in Philadelphia. She can be reached at firstname.lastname@example.org.