Just as in life, in business we make decisions every day; form the unimportant to the monumental. In personal life, these decisions are made for a variety of reasons, and many different things are used as a guide. In business, it is the same, although perhaps it should not be. To make such decisions, simple ROI (return on investment) calculations should drive your decision making as a business leader. However, as we have learned, more than the facts of the situation affect reasoning. Many other things come into paly, such as relationships, potential fallout from a decision, ego, greed, anger, and many other emotions. Risk aversion, the inability to correctly predict the emotional outcome, the way a problem is worded, incidental emotions, and framing can all influence decisions (Goldstein, pp. 378-380).
Recently, I used the framing effect to change the outcome of a business decision at my company. As a director, there are very few things that I need to have someone “higher up” approve, but one of those things is our annual contract with our customers. I knew the program I wanted to present would be a huge success for our company. In the first year, I knew we would see tremendous revenue growth, with only a slight improvement in their program payouts (a hit to our profit). In year two, the added payouts would be gone and we would continue to see revenue increases. For me, this two year focus was what we needed, not a focus on short term profits. A simple ROI calculation showed my point. However, our executive would need to justify their decision to our board, and I believe this was something they did not want to take on. The potential hit to our profit in year-one was the only thing our executive focused on. However, I knew that if we did not go with the program I wanted to present, not only would we lose out on the potential growth, but that we risked a significant portion of our business with this customer. From all the calculations I did, we were putting roughly three million dollars at risk.
After several meetings, the executive’s position did not change. What I needed to do was to change the way I was framing the issue because “one reason people’s decisions are affected by framing is that the way a problem is stated can highlight some features of the situation and deemphasize others” (Goldstein, p. 381). What I came to realize was that I was highlighting the wrong elements of the program with our executive. In all my meetings, I had focused on the potential revenue that would be generated by my deal. While I did discuss the risk, it was certainly an afterthought in terms of the other talking points. I realized I needed to change the focus of my argument or I would be in for a rough year.
What I did has been validated by Tversky and Kahneman, and that is when a choice is framed in terms of gains, people use a risk aversion strategy, and when a choice is framed in terms of losses, people use a risk taking strategy (Goldstein, p.380). By changing the focus to the business we would lose, the executive was now onboard and willing to take the risk of my program.
I’m happy to say that my decision has paid off, and through the end of the first quarter, not only have we seen double-digit revenue growth, but also our profit is on target as a result of our customer selling a better mix of product.
Goldstein, B. E. (2011). Cognitive Psychology (Third Edition ed.). Belmont, CA, USA: Wadsworth.