What is cognitive bias and how does it affect your decision making?

Today’s business leaders suffer from information overload.

Every day they are bombarded with facts, statistics and reports which form the basis for decisions they are required to make, and it can be difficult to process all the data and react appropriately in a timely fashion. This is why human beings tend to use cognitive biases known as heuristics, a legacy from their hunter-gatherer forebears who needed these mental shortcuts in order to survive in a dangerous world.

Fast forward around 200,000 years, and these same mental shortcuts are being used to make business decisions not always based on rational reasoning, but often on emotions, social pressures and favoured ideologies. When your leadership decisions are being shaped by your personal cognitive bias, it could have adverse repercussions for your organisation.

Examples of cognitive bias in business

Confirmation bias:

Decision makers are liable to attach more weight to their own pre-existing viewpoint than it actually merits, instead of approaching information objectively. This may result in only collecting, or paying attention to data which supports a conclusion which has effectively already been drawn. Thus a company with management devoted to its existing products may focus on market research which demonstrates their longevity instead of exploring new product opportunities.

Overconfidence bias:

Many people are overconfident about their skills and accuracy when making forecasts or estimates. But many business decisions are based on forecasts, which give the illusion of control over the future when they are in fact only best estimates of future events. Overconfidence bias can lead to either risky decisions, or decisions which are too conservative. An example is over-reliance on share price forecasting in making decisions about when to buy or sell an investment.

Anchoring bias:

Imagine that your business needs to purchase or lease new premises. When you inspect a promising factory or warehouse, the real estate agent mentions a price well above what you were expecting. However, you are able to negotiate the price downwards and you may think you have secured a good deal, even though you are still paying above the market price. That’s because your decision was swayed or ‘anchored’ by the first piece of information you were given – the asking price – rather than the true value of the property.

Hindsight bias:

This type of cognitive bias can prevent business leadership from learning from past mistakes. It refers to a tendency to revise past predictions after the fact. If your company launches a new product which fails to strike a chord with customers, the responsible decision-makers may later come to the conclusion that they actually had a feeling all along that it was going to fail. Hindsight bias may prevent them from rationally re-examining their original decision in order to pinpoint what went wrong and do better next time.

How to reduce personal bias in business decision making?

There are steps your organisation can take to mitigate the effect of any personal bias that its leaders may unintentionally apply to their decisions.

Review the decision-making process

How are decisions made in your business? Is it left to individuals, or is it the responsibility of a committee? Is it an ad hoc process that may lend itself to unintended biases involving personal mindsets and behaviours?

When important decisions need to be made, it is important to canvas more than one viewpoint by making it a collective activity shared by a diverse group of senior leaders following a documented procedure that reviews all available data and alternatives.

Encourage a culture of diversity

Aiming to have an employee team from varied backgrounds will encourage a culture of diversity to mirror what is happening in the outside world. You will become accustomed to hearing divergent opinions and allow for different perspectives and ways of thinking. This will reduce the likelihood of biases resulting from social factors, or narrow information sources, or preoccupation with some factors while ignoring others.

Challenge your own decisions

When you have arrived at a decision, challenge it before adopting it. Did you have complete information? Have you explored every angle? Are there other ideas and perspectives that need to be considered? You may still come to the same conclusion, but at least you will have reduced the possibility of cognitive bias.

Get an expert outside view

Bentleys’ Business Advisory team has helped many businesses to recognise and eliminate cognitive bias in their decision making, by applying the principles of behavioural economics. Those businesses were helped to grow and prosper without being held back by the limitations of personal preconceptions or unintentional prejudices. If you’d like to have a no-obligation conversation about implementing truly unbiased decision making, contact your local Bentleys advisor to schedule a chat.

Disclaimer: This information is general in nature and should not be relied on as advice. It does not take into account the objectives, financial situation or needs of any particular person. You need to consider your financial situation and needs and seek professional advice before making any decisions based on this information.

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