In the world of Corporate Law decisions — big and small, significant or trivial — must still be made.
Complex decisions should be easy to the professional working in this area, but when stress is brought into the mix, it can be catastrophic for the individual and the organisation.
Psychological research has pointed to a few potential causes. Some research has shown that heightened stress levels cause our attention to narrow. Humans already have a tendency to focus on often irrelevant, but readily accessible, characteristics when making decisions.
Other research has shown that the more stress people feel, the more inclined they are to see patterns that don’t exist.
Researchers at the University of Texas formed two groups of undergrads — one group was given a task that was simple, and the other an impossible and frustrating task. When presented with the real experiment, which was intended to measure their ability to recognize patterns, the stressed-out students reported seeing more images that didn’t exist in digital pictures and consistently selected certain stocks based on what was actually random, uncorrelated data.
Time and again, the group that felt more stress claimed to see images where there were none and found stock patterns that didn't truly exist. It’s not terribly difficult to see how this could impede real-world investment decisions.
However, struggling to remain rational in the face of stress isn’t merely a test of will, due to the fact that there are actual physiological mechanisms at work when we are acutely stressed out that impair our ability to make rational, clear-headed decisions.
Acute stressors trigger our glands to release elevated levels of the hormone cortisol into our circulatory system as part of the so-called “fight or flight” response. Part of this process also reduces activity in our pre-frontal cortex, where thinking occurs, while adrenaline simultaneously elevates basic physiological activity, like increasing our heart rate and breathing. Our body is being primed for one binary but critical decision: attack the threat or flee from it. These mechanisms help with that simplistic job.
But research shows that individuals with elevated levels of cortisol make riskier — and worse — decisions when confronted with more complex problems. One study administered oral steroids to the test subjects, while the control group received a placebo. Subjects were then asked to select between several different gambles. Those individuals who had ingested the hydrocortisone tablet consistently made the riskiest, and worst, bets.
Cortisol can fire us up as we rapidly decide to defend ourselves or flee from a physical threat, but it’s highly counterproductive when it comes to rapidly weighing complex odds.
Even something as apparently innocuous as being a little tired or hungry can affect our judgement. Another interesting study investigated factors affecting the decisions of parole judges. While the authors hoped that variables such as the facts of the case, severity of the crime, and prior precedents would drive impartial judicial decision making, they were dismayed to find that the single most highly correlated factor with decision was time of day. In the morning, early afternoon, and after a late day break, parolees received a favourable ruling about 65 percent of the time. However, in the hour or so before lunch and before the afternoon break, the percentage of prisoners granted parole fell precipitously to zero.
Tired and hungry judges simply didn’t have the mental stamina needed to rationally deliberate, and so they made the most energy efficient decision possible: no to everything. Again, it’s not terribly hard to conceive what the investment parallels might be.
We crave certainty and use mental shortcuts when making decisions. Stress increases our reliance on these heuristics and makes us more prone to project patterns that aren’t there, which in turn makes us even more overconfident than we normally are. And biological responses to these stressors prod us to make more extreme decisions precisely when we should be most circumspect.