The theme of fiscal austerity seems to ebb and flow as markets across the world expand and contract. In the current climate, one can see both expansion and contraction happening at the same time. Only noticing one of the two can lead to a distorted view of how things really are. To illustrate, news outlets are reporting Sprint is attempting to trim $2.5 billion from the company’s operating expenses by targeting employee costs. The banking industry is also trying to circle the wagons, as over 100,000 banking jobs have been cut since 2012 in the European Union alone. Contrast that with news from the social media giant Pinterest that it is undergoing close to a $20 million renovation of its office space that, among other things, will make the kitchen and dining areas look more like a food truck.
While both companies make diverging decisions, Dr. Shlomo Benartzi of UCLA penned an article in the Wall Street Journal recently on behavioral science and our decision-making when it comes to investing. The article speaks to the concepts of myopic loss aversion and careless optimism. Let’s explore how each of these impacts our decision-making as leaders.
Bentarzi defines myopic loss aversion as “the tendency to make investment decisions based on short-term losses, thus ignoring the long-term investment plan.” Basically, the more you check on your portfolio, the more apt you are to make a knee-jerk reaction to the market. Bentarzi continues: “Given the profusion of connected devices, I think most people will end up looking at their investment portfolio far more frequently in the 21st century than they ever have before. Over time, this abundance of feedback might make us more vulnerable to myopic loss aversion… In other words, our investment horizon might shrink to reflect the frequency of feedback.”
Think about Sprint and Pinterests’ decisions. Without all the details, it’s impossible to say whether either company is making a knee-jerk reaction, but they illustrate the principle that we tend to make decisions based on short-term outcomes that don’t always take into consideration the long-term strategy.
In leadership terms, we tend to overestimate what we can do in 1 year and underestimate what we can do in 5 years. We can get so focused on the next big thing, whatever it is, that we forget to consider the long-term strategy.
Loss aversion can keep us from making courageous decisions. For instance, sometimes it is courageous to stay when everyone else is leaving or jumping ship. Think of Dietrich Bonhoeffer with the German church in World War 2 Germany. In the 1930’s, as war was becoming more imminent, he had the opportunity to leave the country so that he could save himself, but after painstaking prayer, he decided to stay in his home country to minister and preach against the evils of the Third Reich. Sometimes we need the courage to decide to stay.
At other times, though, we need the courage to step out. Daniel Kahneman, Nobel Prize winning economist, describes in a 2007 article for Foreign Policy that “Psychological research has shown that a large majority of people believe themselves to be smarter, more attractive, and more talented than average, and they commonly overestimate their future success. People are also prone to an “illusion of control”: They consistently exaggerate the amount of control they have over outcomes that are important to them-even when the outcomes are in fact random or determined by other forces.”
Our culture feeds us the myth that if we just grab hold of our destiny, we can achieve whatever we want. We think we know where we need to go. But the truth is, only God knows the plans that he has for us (Jeremiah 29:11). He may have an assignment for you that you don’t know about because you are too clouded with visions of what you want your life to become. We must die to our own conceptions of our future and trust that God knows the best way forward.
Both of these behavioral science concepts, loss aversion and careless optimism, illustrate that as leaders we have to be so careful to make sure our vision is clear. We can become too narrow in our focus and make overly reactive decisions when instead we need to take deep breaths and think through long-term implications. That’s where a good team is so helpful.
But we can also become too proud of ourselves and overestimate our future success, blinding ourselves to courageous faithfulness to Jesus. In the end, Christian leadership is less about becoming a more successful person, business, or organization, and more about faithfulness to Jesus. “The fear of the Lord is the beginning of knowledge.” (Proverbs 1:7)