The Impact of Emotions on Business

January 14, 2011

Leadership

If I asked you would you take $100 from me with no strings attached in 1 year or instead take $110 in 1 year and 2 days what which would you pick?

95% of people asked would wait the 2 extra days and take the $110. Why not? An extra $10 in only 2 days. Makes sense to me.

Now how about if I asked you would you rather have $100 today or $110 2 days from now which would you take? Most people (over 80%) will take the $100 today. Why? The financial benefit is exactly the same as in the first example. The percent of improvement over a 2 day period is the same in both cases. You wait 2 days more to get $110 than you would to get $100. In this example the difference is the emotional factor of immediacy. It skews our judgment and our logical way of thinking. It makes people make the wrong decision more often.  By the way this experiment has been run many times with college students from several prestigious schools with the same results.

Why do stock markets have huge upside and huge downside beyond key measurable indices? Why are their pricing bubbles in real estate? Why was all of homes selling for significantly more a few years ago then they were actually worth? Why does the price of gasoline not always track to the price of oil?

Underneath all of these examples is a factor of human emotion playing on the non-emotional metrics. As an example seeing home prices in certain geographies having dropped by more than 50% in less than 2 years goes well beyond the objective and unemotional financial drivers of home pricing value. In fact the drop in prices is as much tied to an inflated value leading up to the drop. So how did the price of homes increase 50% in 1 to3 years? One can argue supply side economics which might explain a part of the rise and fall but not all of it. Most of the affect in this example and for many others are driven by complex emotions and the “feed effect” or having these emotions impact the masses to a point where logical thinking and rationale does not prevail. Looking back afterward one can clearly see what happened and why – it becomes explainable yet while “in the moment” most people will fall victim to the emotional spin. In some cases it is very exciting to be part of a “bubble” knowing that the bottom will fall out. We can talk ourselves into participating and unfortunately for some of us not getting out quick enough.

What happens when situations of emotion are in the workplace? What happens after a wonderful year where nothing could go wrong and all key metrics were exceeded? What happens after a lousy quarter where revenue and margin are off and customer loyalty falls off the cliff? The contention here is that in both examples emotions come into play and affect how employees and businesses think, act, and make decisions moving forward. The same emotions that allowed a senior exec to overpay for a home during the real estate peak come into play at work. There is no escaping it.

As leaders we must realize these situations cannot be avoided or managed around and rather should be anticipated and dealt with. Educating at all levels that these emotions of business results and patterns will cause us to make bad decisions will force employees to rethink decisions. These decisions can be as simple as whether to spend a little more on a plane ticket on a business trip because “we just had a great quarter” to avoiding taking a necessary business trip to see a client because” we missed our monthly revenue targets”. This does not mean we don’t take into account the visible patterns (positive and negative) of business. We must and these patterns should matter. It is just when the emotions take over and move a business into the wrong direction or paralyze the business around critical activities. As leaders we must constantly be looking for the emotional cues and deal with them head on. Take results for what they are and make corrective actions with the emotion out. Communicating the respect for these emotions and their impacts on how the business runs will help the bigger team manage through the turbulent emotional times far better.

Great leaders anticipate the emotions of the business and align the business to minimize its impact.

Great leaders don’t minimize the impact of a good or lousy quarter or how the business must redefine how it runs in response.

Great leaders are able to put the emotional impact into perspective.

Great leaders create the right balance to recognize and react.

Another consideration is knowing that your competitors are going through the same emotional impacts to their business. You have an opportunity to capitalize on this exposure in managing through their highs, lows, complacency and overconfidence.

I suggest you add the category of “Emotional Impact” to your human capital strategy. This will help you better anticipate swings in emotions and the impact on your business.

About Frank Picarello

Frank is a well-respected leader in providing technology services to small and medium-sized businesses. He is currently COO for TeamLogic IT, Chairperson for CompTIA's Small Business Owner's Group, and a member of CompTIA's Unified Communication Committee.

View all posts by Frank Picarello

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