How Emotions Shape Business Decisions

In this mental shortcut, emotions guide our judgment of risks and benefits. The affect heuristic isn't just another entry in the behavioral economics textbook. It's a force that silently shapes countless business decisions, particularly those involving human elements like employees, brands, or locations.

Once we develop an emotional preference, our minds often shut off to contrary evidence.

Consider the case of Nokia's headquarters relocation from Finland in 2008. The project team, deeply connected to the company's Finnish heritage, consistently underestimated the benefits of moving and overestimated the risks. As one former executive noted, "We weren't just analyzing a real estate decision—we were grappling with our identity." The affect heuristic was in full swing, coloring every spreadsheet and presentation.

This emotional bias isn't malicious—quite the opposite. Project teams often embed their preferences in analysis precisely because they care deeply about the outcome. They've spent months, sometimes years, immersed in the details. As behavioral economist Dan Ariely observes, "We don't see things as they are, we see them as we want them to be."

The phenomenon becomes particularly pronounced in situations involving workforce reductions. A project team member who has worked alongside affected employees might unconsciously inflate the costs of downsizing while minimizing its benefits. As Nobel laureate Daniel Kahneman explains, "When you like something, you think its risks are smaller and its benefits are larger."

Take the case of a major European bank's technology modernization program. The project team, having spent years with the legacy systems and their maintainers, consistently recommended gradual upgrades over complete replacement. Their analysis wasn't wrong—it was incomplete, colored by their relationships with the existing team. As Peter Drucker warned, "The most serious mistakes are not being made as a result of wrong answers. The truly dangerous thing is asking the wrong question."

This brings us to a crucial point: Project teams often believe they should be the ultimate decision makers. After all, they've done the analysis, they know the details, they've lived with the problem. As one private equity executive put it, "Every deal team thinks their deal is the best deal."

But here's the rub: While teams may have superior micro-level knowledge, they often lack macro-level context. They see the trees with perfect clarity but miss the forest entirely. Ray Dalio captures this in his principle of "believability-weighted decision making"—not everyone's opinion should carry equal weight, especially when emotions are involved.

The affect heuristic becomes particularly potent in three common scenarios:

1. Employee Impact Decisions When teams know the people affected by their recommendations, emotional proximity can cloud judgment. As Seth Klarman notes, "The hard part isn't the analysis—it's managing your emotions."
2. Brand Decisions Teams can become emotionally attached to brands they've worked with, leading to overvaluation. Remember Quaker Oats' emotional acquisition of Snapple? The result was a $1.4 billion write-off.
3. Legacy Asset Decisions Historical connections to facilities or products can lead to maintaining unprofitable operations long past their expiration date. Kodak's emotional attachment to film is a classic example.

For decision makers, the challenge is twofold: recognizing the affect heuristic's influence and creating structures to counteract it. Some practical approaches:

• Require teams to explicitly state their emotional connections to the subject
• Use independent review panels for emotionally charged decisions
• Create standardized evaluation frameworks that separate emotional and analytical factors
• Rotate team members to prevent deep emotional investment

For senior executives, the key is creating a culture that acknowledges the affect heuristic without demonizing it. Good intentions don't work. Mechanisms do. Put in place mechanisms that help teams recognize and compensate for emotional biases while preserving their valuable deep knowledge.