How emotion can affect your business decisions
Nelson Mandela once said: “May your choices reflect your hopes, not your fears.” Wise words, as you might expect, from the man affectionately known as ‘Madiba’.
It's a sentiment that applies surprisingly well to running a business.
Emotions are part of being human. They can influence how we respond to challenges, how much risk we're willing to take, and the opportunities we're prepared to pursue. Sometimes, that emotional response can be useful. Fear might highlight a genuine risk. Excitement might help us recognise an opportunity.
But emotions can also cloud our judgement.
Even successful businesses experience difficult periods. Markets change, customers leave, costs rise, and unexpected bills appear. The businesses that navigate those moments successfully aren't necessarily the ones that never make mistakes. They're often the ones that can step back, assess the situation, and make decisions based on what their business actually needs.
We're only human, after all. That means we're all susceptible to psychological biases that can influence our decision-making.
Some of the most common include:
Fear and loss aversion
Greed and the overconfidence effect
Stubbornness and confirmation bias
Apathy and anchoring bias
FOMO and herd mentality.
Understanding these biases won't make you immune to them. Yet, recognising them can give you the opportunity to pause, question your instincts, and make more carefully considered, strategic decisions.
Fear and loss aversion could lead to short-term thinking
It doesn't take a rocket scientist to understand how fear can affect financial decision-making.
One of the most well-known examples is loss aversion, a concept developed by psychologists Daniel Kahneman and Amos Tversky as part of their Nobel Prize-winning work on Prospect Theory.
Put simply, we tend to feel the pain of a loss more strongly than the joy of an equivalent gain. That's why losing £500 can feel considerably worse than gaining £500 feels good.
Research into football fans by the University of Sussex found a similar effect, with respondents reporting that the anguish of defeat was felt around twice as strongly as the ecstasy of victory. This tendency can have a significant impact on how we make decisions.
Imagine you're suddenly faced with an unexpected business expense. Your cash flow is already under pressure, and the thought of making the wrong move is worrying you.
That pressure might push you towards the quickest finance option available, without giving enough thought to the interest rate, repayment terms or whether the finance is actually appropriate for your situation. You might solve today's problem only to create a bigger one six months down the line.
Read more: Why fast finance isn’t always smart finance
Fear can also work in the opposite direction.
Perhaps you've identified a major growth opportunity — a new contract, premises, product or customer base — but pursuing it would require investment. The potential downside feels frightening, so you decide to play it safe.
Sometimes, that's exactly the right decision.
But if fear consistently pushes you towards the option with the smallest immediate risk, you could also end up turning down opportunities that would have strengthened your business in the long term.
The lesson isn't that you should ignore risk. It's that risk should be assessed, rather than simply feared.
It’s only natural that when something threatens your business, your first instinct may be to protect what you’ve already built. Taking a step back allows you to ask whether you’re genuinely protecting the business — or simply protecting yourself from the discomfort of making a difficult decision.
Greed and overconfidence can make risks look smaller
Fear isn't the only emotion that can affect our judgement.
When business is going well, it's easy to become confident in your decisions. Sales are growing, customers are happy, and an investment you made has paid off.
Confidence is important. Without it, few people would have the courage to start or grow a business in the first place. But confidence can become overconfidence.
The overconfidence effect describes our tendency to overestimate our knowledge, abilities or chances of success. In business, that might mean assuming that because something worked once, it will automatically work again.
You might invest heavily in a second premises because your first one is thriving. You might take on significant new costs because you expect sales to continue growing at the same rate. Or you might commit to an ambitious project without allowing enough time or money for things to go wrong.
There's also a risk that the potential reward becomes more exciting than the potential downside.
When you're thinking about what you could make, it's easy to underestimate what you could lose.
Before making a major investment, ask yourself: Would I still make this decision if I wasn't relying on my previous success to guarantee the next one?
Confidence is valuable. But savvy business owners leave room for contingency plans.
Stubbornness and confirmation bias can hinder your ability to change course
Persistence is one of the qualities that helps business owners get through difficult periods.
Starting and running a business takes determination. There will be setbacks, failed ideas, and moments when walking away would be easier than carrying on. However, persistence can become a problem when it turns into an unwillingness to change direction.
Confirmation bias is our tendency to look for information that supports what we already believe, while overlooking information that challenges it.
You might believe a particular product is going to be a success, so you focus on positive customer feedback while ignoring disappointing sales.
You might believe a marketing campaign is working because one post performed brilliantly, despite the wider figures telling a different story.
Or you might dismiss advice from an accountant, Business Advisor or member of your team because it doesn't fit with the decision you've already made.
The more time and money you've invested in something, the harder it can be to accept that it isn't working.
Yet, changing your mind isn't failure. Sometimes, recognising that your original plan needs to change is one of the strongest decisions you can make.
Try asking yourself: “What evidence would convince me that I'm wrong?”
If the honest answer is “nothing”, it may be time to take a step back.
Apathy and anchoring can keep your business stuck
Not every poor business decision comes from a dramatic emotional reaction. Sometimes, it's simply easier not to make a decision at all.
When you're busy running a business, reviewing your pricing, changing suppliers, updating processes or reconsidering your business model can all feel like jobs for another day.
That's where anchoring bias can become a problem.
Anchoring is our tendency to rely too heavily on the first piece of information we receive when making a decision. An initial figure, assumption or experience can become the reference point against which everything else is judged.
For example, perhaps your pricing worked well when you first launched your business five years ago. But have you taken time to consider whether:
Your costs have changed?
Your competition has grown?
The value you provide has diminished or grown?
Your customer base has changed?
The same applies to staffing, premises, suppliers, and the way you operate.
“We've always done it this way” isn't necessarily evidence that something is still working. Sometimes, the biggest risk to a business isn't making the wrong decision. It's failing to make a necessary decision at all.
Regularly reviewing your assumptions can help you spot when yesterday's solution no longer fits today's business.
FOMO and herd mentality can send you in the wrong direction
Few things make us question our decisions like watching someone else succeed.
A competitor opens a second premises. Another business launches a new product. Someone in your industry announces a huge investment. Suddenly, it feels like everyone else is moving forward while you're standing still.
That's where FOMO — the fear of missing out — can influence business decisions.
It can also contribute to what's known as herd mentality, where we follow the behaviour of a larger group, particularly when we're uncertain about what we should do ourselves.
Keeping an eye on your competitors and industry is sensible. You need to understand what's changing around you. But copying someone else's decision doesn't guarantee you'll get the same result.
A competitor may have different customers, different margins, more cash in reserve or a completely different long-term strategy.
The latest trend might transform one business while becoming an expensive distraction for another.
So before following the crowd, ask: “Is this right for my business, or does it just look right because everyone else is doing it?”
You don't have to be first. You need to make the decision that makes sense for your business.
So, how can you make better business decisions?
The answer isn't to remove emotion completely. That's impossible. We're people, not machines.
Emotions can provide useful information. Fear can highlight a risk. Excitement can draw your attention to an opportunity. Frustration can tell you that something isn't working.
The important thing is to recognise those feelings without automatically allowing them to make the decision for you.
There are several practical ways you can build a little more distance between your emotions and your business decisions.
Give yourself time
If you're angry, worried, extremely excited or feeling pressured, pause if you can.
Not every decision needs to be made immediately. Allowing your emotions to take over the driving seat can very quickly lead to problems for the business (and potentially personal burnout).
A waiting period gives you an opportunity to return to the problem with a calmer perspective.
What felt like an emergency yesterday might look very different after you've had time to consider the numbers.
Of course, some business problems genuinely require immediate action. But acting quickly and acting impulsively aren't the same thing.
Have a strong business plan to come back to
A good business plan isn't something you write once and forget about. It should give you something to refer back to when you're faced with uncertainty.
Knowing where you want the business to go makes it easier to judge individual decisions against your longer-term objectives.
Instead of asking: “Does this feel like a good idea?” You could ask: “Does this move the business towards where I want it to be?”
Your cashflow forecast is just as useful.
Understanding what money is coming in, what's going out, and what your future commitments look like can help take some of the guesswork out of difficult financial decisions.
Find someone who will challenge you
You don't have to make every important decision alone.
A trusted Business Advisor, accountant, mentor or experienced colleague can provide something that's difficult to create for yourself: distance.
They aren't emotionally attached to your original idea. They don't have the same history with your business. They can ask the awkward questions you might not think to ask yourself. That's valuable.
A good sounding board shouldn't simply tell you what you want to hear. They should help you test your thinking.
Don't wait until you need finance — be proactive
Finance is often easier to approach when it forms part of a wider plan rather than being an emergency response.
If you know you want to expand, invest in equipment, take on staff or pursue a major contract, start thinking about the financial implications early.
Understand what the investment is likely to cost, what it could generate, and how repayments would fit into your cash flow. This gives you time to explore your options rather than reaching for the first source of finance available when you're under pressure.
Responsible finance should support a clear business purpose and a realistic plan for repayment.
Ask yourself five important questions
Before making a major decision, take a moment to ask:
1. What am I feeling right now?
Am I excited, frightened, angry, frustrated or worried about missing out?
2. What does the evidence tell me?
What do my cash flow, sales, customer feedback, and other available information actually say about the state of my business?
3. What would someone who disagrees with me say?
Am I considering information that challenges my thinking, or only information that supports it?
4. What happens if I'm wrong?
Can the business absorb the downside? Do I have a contingency plan?
5. Does this support my long-term goals?
Will this still look like a sensible decision six or twelve months from now?
You don't need to have perfect answers. The value comes from taking the time to ask the questions.
You don't have to make big business decisions alone — get in touch
Running a business is personal.
For many owners, it's something they've built from scratch, and invested their time and savings into. Of course you're going to feel strongly about it.
The aim isn't to become a completely rational, emotionless decision-making machine. It's to recognise when your emotions are influencing your judgement and create enough space to consider what the business actually needs.
That can be difficult to do when you're in the middle of a problem.
This is where having the right people around you can make a real difference.
At First Enterprise, our Business Advisors and Investment Managers work with you to understand where you are now, where you want to go, and what might help you get there. Sometimes that means exploring whether a Start Up Loan or Business Loan could benefit your business. Sometimes it’s walking you through developing a business plan or mapping out a cashflow forecast. Sometimes it means challenging an assumption, talking through a growth opportunity or helping you think through your options.
And sometimes, it simply means having someone outside your business you trust to give you advice and guidance. To genuinely listen to you and your problems.
If finance is part of the solution, we can also help you explore whether one of our Start Up Loans or Business Loans could be appropriate for your plans. To start the discussion, simply complete the form below or give us a call at 0345 602 7355.
After all is said and done, we want you to be in the best possible place to make the right choice for your business — not the decision fear is telling you to make, not the decision your competitors are making, and not necessarily the decision that feels most exciting.
We’re human too and we know just how important having someone to chat to when your emotions are running wild can be. So, take a deep breath, stay calm, and let’s talk.
Please note:
This article is for general information only and does not constitute advice. All information is correct at the time of writing and is subject to change in the future.
Please do not act based on anything you might read in this article.
We always recommend that you seek direct financial advice from a relevant expert or professional before making any financial decisions.
First Enterprise is a not-for-profit, FCA-regulated finance provider offering loans from £500 to £250,000 for startups and growing businesses across the UK.
We support businesses that struggle to access mainstream finance, with a focus on underrepresented groups. Funding is delivered through government-backed national and regional programmes.
We offer human-made lending decisions, a dedicated advisor for every applicant, and no penalties for early repayment.
