When the stakes are higher, should you make cautious business decisions or riskier ones? The answer might surprise you.
“Five years ago, most farmers were making money, but now they are losing money,” says Ray Massey, ag economist, University of Missouri Extension. “You’d think people would be more conservative. But farmers may think they need to take the risk because they are losing money.”
Loss aversion, a behavioral economics concept, explains the pain of losing is psychologically twice as powerful as the pleasure of gaining.
“You like winning and dislike losing,” Massey says. “But you dislike losing more than you like winning. Negotiations over a shrinking pie are difficult because they require an allocation of losses, whereas an expanding pie is an allocation of gains. If you conceded $25 an acre in cash rent as a landowner, you encounter a loss, and your tenant just made $25.”
Understanding these emotions is helpful when working through negotiations, marketing plans and growth opportunities.
The Fundamentals of Strategic Decisions
In any given day, you make endless decisions. Some will be quick, while others have long-term consequences. Craft a framework to make the right decisions.
Creative Alternatives: Outstanding decision-makers are exceptional at generating alternatives, says Nicole Widmar, ag economist at Purdue University. “Your choice can be no better than the best of your set of alternatives.”
Relevant and Reliable Information: You can only get so much information, says Jennifer Meyer, a strategy consultant with Strategic Decisions Group. Be sure it’s from unbiased sources.
Clear Values and Trade-Offs: Write down all your concerns about your big decision, Widmar suggests, then convert your concerns into succinct objectives.
Sound Reasoning: “We make mistakes about complex situations if we just trust our gut,” Meyer says. Instead, use tools such as a decision tree or scenario planning to represent what might happen.