Cognitive Biases in Decision Making

9 cognitive biases and how to reduce them.
An abstracted photo of a colouful rorschach

Cognitive bias is systematic error in thinking; a prejudiced or distorted processing in interpreting information.

Do you know your biases?

Take a few minutes and visualize as strongly as you can the details of the following:

You are going to a high-tech conference in Vegas. You get to the airport early for your flight and, somewhat to your surprise, are greeted by the captain who directs you to your seat. The flight is uneventful. You go to dinner at the hotel and can see and overhear a couple celebrating their wedding anniversary. They are enjoying champagne and holding hands across the table. The next morning the hottest tech guru starts off the conference.

Next, ask yourself the following:

  • Was your pilot black?
  • Was the couple celebrating their wedding gay?
  • Was the tech guru a quadriplegic?

We all come with biases. The more you are aware of them, the better you will succeed in life.

Why are cognitive biases important to recognize?

  • Business decisions are often made on a few variables and can be easily skewed by cognitive biases and detract from success.
  • Some success in business can lead to people becoming overconfident in their decisions.

“The impact of cognitive bias on a business can be large as it hinders good decision-making. Managers may hire the wrong candidates, may implement the wrong growth strategies, or fail to understand new technology and information that may further enhance a business.”

By Adam Hayes, Ph.D., CFA, Financial Writer for Investopedia
Article: How Cognitive Bias Affects Your Business

How many cognitive biases are known?

  • Many – over 100.
  • We delude ourselves into thinking we know what we are doing to justify our decisions.
  • For our purposes, we will try to understand nine important ones and ways to mitigate them.

9 Cognitive Biases

1. Overconfidence Bias

The Dunning-Kruger Effect

Having a false sense of confidence in one’s skills, talents, and abilities when lacking knowledge or experience in a certain area.

A graph showing the relationship between confidence and competence

2. Self-Serving Bias

Attributing positive events and successes to ourself but blaming negative outcomes on others or external circumstances.

comic about self serving bias where one girl is saying "yay! A+ I'm so smart" with the caption "takes the credit for positive events" and then another girl saying "F grade... She doesn't like me" with the caption blames external factors on negative events.

3. Anchoring Bias

Getting stuck on the first piece of information we learn (e.g., the cost of something).

doodle drawing about the anchoring effect where a stick man is choosing a mug that's has the price $1000 crossed off to $300 rather than a mug that is just $300

4. Loss Aversion Bias

The pain of losing is twice as painful as the pleasure of gaining.

cartoon man being shocked looking at a graph that says he has losses, but the gains are double that of the losses

5. Framing Cognitive Bias

Being overly influenced by how the information is presented or framed and overlooking factual data.

doodle drawing about the framing effect where a stick man is reaching for a yogurt that says 80% fat free over a yogurt that says %20 fat

6. Herd Mentality Bias

The tendency to follow and copy what others are doing.

a two frame comic with the first one having a dog speaking to a person saying "I'm starting a crypto exchange so give me all your money" and the second pane with the man saying "do I look like a fool? I wouldn't trust you with my money unless you had celebrity endorsements!"

7. Confirmation Bias

To interpret new evidence as confirmation of one’s beliefs or what one wants to believe.

a comic drawing of people lining up for a booth labeled "comforting lies" and no one lining up at a booth called "uncomfortable truths"

8. Hindsight Bias

The tendency to perceive past events as more predictable than they actually were.

Example: When sports fans know the outcome of a game, they question certain decisions coaches make that they otherwise would not have questioned or second guessed.

a doctor with a sitting patient in front of an eye chart with the caption "your investments are not working out because your hindsight is 20/20 and your foresight is 20/400"

9. Sunken Cost Bias

The tendency to continue investing time, effort, and money in a losing proposition when the ongoing costs outweigh the benefits.

a comic of two people talking and the caption "I'm a man of my word... once I've made a wrong decision, I stick to it!"

How to reduce biases

  • Involve others and ask them to do a ‘pre-mortem’ to challenge your ideas (What would failure look like? What could go wrong?)
  • Do not be restricted by false constraints. Great businesses are made by exploiting opportunities, not solving problems that just restore normality.
  • Check the basics! The devil is in the details.

Monitor each other for unconscious bias

Again, when people are overconfident about their abilities to predict, they make risky decisions that potentially have bad outcomes. Also, make a conscientious effort to politely challenge others on potential biases and consider alternate explanations, underlying facts, and what could go wrong.

Socratic Questions

To help you evaluate your own cognitive biases.

Clairificaitons Interesting, could you tell me more? What would that look like?
Probe Assumptions How might we verify or disprove that assumption?
Probe Reasons and Evidence What would be an example? Is there something else that’s similar?
Viewpoints and Perspectives Is there an alternative? Is there another way to look at this?
Clarify the Question Can you explain the reasoning behind your question?
Probe Implications and Consequences What generalizations are we making? What implications does our approach hold? What are the consequences of that assumption?

These questions are not intended to be aggressive or as an attack, but to test whether biases are unconsciously present. Try to be soft with your language, and slow to take offense from these kinds of questions.

Source: http://websites.umich.edu/~elements/probsolv/strategy/cthinking.htm

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Written and Constructed by Larry Stefan 

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