Cognitive Biases in Decision Making
I remember reading an article published by London Business School on how it is important to reward managers on the quality and process of their decision-making rather than the actual outcome of those decisions. It was a great article and it has stayed with me over the years.
As I moved into the Organizational & Leadership development space, I encountered several studies that have uncovered multiple cognitive biases in human decision making that occur at a subconscious level day in and day out. A lot of us make judgments and decisions simply because they “feel right” rather than subjecting the decision making process to a logical analysis.
Many decisions made in an organizational context, such as hiring the right candidate or spending millions of dollars expanding in new markets, are critical in that they create multiple ripple effects affecting several components and sub-components. Understanding, recognizing and tackling these biases is an important step towards improving the quality of your decision-making processes and satiety of resulting choices.
While the infographic gives 20 different scenarios, I will briefly touch upon few of the very common biases that we continually live with but might be completely unaware of.
Confirmation Bias
The most popular of all biases in decision-making is Confirmation Bias. This will not be new to you if you have heard the term ‘preconceived notions’. Simply put, we look for confirmation to our pre-existing ideas and beliefs in any given situation. It is that classic conspiracy theory where beliefs, hypotheses and events seem to fit magically into our narrow windows time and again because we look for information that confirms to such biases.
A good way to overcome this bias is to create 3-5 alternatives and evaluate each objectively on equal merits and demerits before “jumping” to a conclusion. It will also help to get a fresh pair of eyes to look at the same situation, one whose outlook is diametrically opposite to yours.
Anchoring
Anchors are thought to be very common in setting a first-mover advantage in a negotiation. When one party to a negotiation puts a deal forth first, invariably the actual deal is quite close to the anchor set by the first mover. To overcome this, especially in a negotiation, it helps to add new dimensions and parameters to the deal that were not considered initially. This makes the first offer redundant to an extent and breaks some of the anchors.
Availability Bias
This mental shortcut is rampant in fast paced, high-pressure environments that demand quick turnaround times. It means making a decision based on information that is available most quickly or that which comes to mind immediately. It is a no-brainer that decisions made under such circumstances have higher likelihood of being made with incomplete information and leave out important factors relevant to the final outcome.
Prospect Theory
According to Prospect Theory, developed by Daniel Kahneman, people are likely to take more risks in a potential loss-making situation as compared to one where they might be making gains. An example here is how investors react to buying or selling stocks depending on the changes to their portfolio as compared to the expected value of the portfolio. Investors pull out of stocks when prices are dipping, quite contrary to what they should be doing, that is buying more stocks so that the average purchase price per stock in their portfolio lowers down. And there is a surge of buyers in the stock market when the index soars and stocks are expensive, again a very contrarian behavior.
Stereotyping
Again, a highly common bias, stereotyping results in more loss of opportunities than one might actually think. It’s strange but this bias shows up day in and day out in our everyday decisions and conversations acting more like our comfort zone and justifying our choices and decisions. For example, dismissing a candidate during the hiring process because they come from a certain state or university or they look a certain way, dismissing an employee for promotion because of demographics, age or sex. Associating intelligence with someone who is dressed in a suit and dismissing someone as frivolous if they look like a hippie some more commonplace happenstances. And this is exactly the bias that Silicon Valley has overcome to drive disruptive innovation and bring remarkable products to the market.
Susceptibility to such and other biases is at its highest when we are fatigued, stressed out or multitasking because they occur outside of our conscious awareness. Higher level cognitive tasks such as decision making, use limited brain resources located in the pre-frontal cortex. Be as much aware of your own biases and time the processes around critical decision making when you are relaxed and are free from distractions as much as possible.
