The Effect of Cognitive Bias in Decision-Making

The human mind is a fascinating yet unusual organ.?In order to simplify the complex, multifaceted world that we live in, and make decisions relatively faster, our brains create shortcuts known as ‘Cognitive Biases’. These biases affect all aspects of our lives and can be particularly detrimental to decision-making in business; this risk will be explored throughout this article.

What are Cognitive Biases?

First coined in the 1970s by Israeli Psychologists, Amos Tversky and Daniel Kahneman, cognitive biases are considered to be errors in thinking that can lead to a misinterpretation of information from the world around us, affecting the accuracy of our decisions and the rationality of our judgements. Biases are generally an automatic process formulated by our brains as an attempt to make decision-making more efficient by simplifying information processing to help us make sense of the world and reach decisions faster.

A cognitive bias can be conscious or subconscious and be caused by several factors such as emotions, social pressures and mental shortcuts (i.e., heuristics).

The different types of biases

Following the decades since the introduction of the concept of Cognitive Bias, there has been a considerable amount of research conducted into this psychological field. Various researchers and psychologists have weighed on what they believe constitutes a cognitive bias; however, for simplicity, this articles merely focuses on ten types of biases that are most commonly associated with decision-making.

Figure.?Cognitive Biases.

1.??Authority Bias

Authority bias is when we favor opinions and ideas that come from an authority figure (i.e., a CEO or senior executive). We often trust and take an authority figure’s ideas at face value, even if they may be factually incorrect and inaccurate.

Example:

Your manager believes the company should invest in Stock A; however, your research indicates that Stock B has the biggest upside. Nevertheless, as Stock A is recommended by a senior executive, you disregard the evidence and assume they are correct.

2.???Confirmation Bias

Confirmation bias occurs when we focus on information that supports our existing beliefs and preconceptions. As a result, we are likely to ignore any information that contradicts these opinions.

Example:

A boss who is not happy with an employee that has recently underperformed may believe that the employee’s overall performance at work is significantly lower than it actually is.

3.???Sunk Cost Bias

Sunk cost bias is our tendency to continue investing in a project because we have already invested considerable resources or time, regardless of whether the current costs outweigh the benefits.

Example:

A change in direction would make a business project more profitable, but your team has already invested over 100 hours into doing it, so you decide to not change or abandon the project.

4.???Halo Effect

The halo effect is our overall impression of an individual, which can influence our feelings and thoughts towards the individual’s character. We tend to group positive aspects about a person and presume that where one good quality exists, so does another.

Example:

Your business is recruiting new employees and someone you trust says that one of the candidates in particular is “highly recommended”, “highly competent”, and “comes from a great family”; you therefore select this candidate rather than the other qualified applicants, reducing the significance of the recruitment process.

5.???Dunning-Kruger Effect

The Dunning-Kruger effect is the tendency for the unskilled to overestimate their abilities and for the skilled to underestimate their ability.

Example:

While a physics teacher with no prior management or business experience or know-how overestimates their ability to run a Fortune 500 company, a Fortune 500 company CEO with prior management experience and know-how underestimates their ability to run the same company.

6.???False Consensus

False consensus is the tendency to overestimate the proportion of how many other individuals agree with us, leading to the belief that our values are considered “normal”, and that most other people share these.

Example:

A business manager wants to implement a new policy for the company. They believe that most if not all other individuals in the company agree with the policy change and that it will benefit everyone. This is in spite of no or little contemporary evidence in the business setting indicating that individuals agree with the change.

7.??Bandwagon Effect

Sometimes referred to as herd mentality, the Bandwagon effect is when we conform to a certain view, behavior or attitude because other people are doing it, and we want to fit in. We often conform against our personal beliefs to minimize conflict and to not be excluded.

Example:

A crucial decision must be made about the future of the company. Most of the board directors favor one decision. Other directors have reasonable reservations about the decision but do not speak up about it because they are scared to go against the groupthink. They side with most of the board directors.

8.???Framing Effect

The framing effect is when we reach a decision based on the way that the information is presented to us, rather than basing it on the facts.

Example:

Financial Advisor A: If we invest in this stock, we will make a profit of ￡100,000.

Financial Advisor B: If we invest in this stock, we have a 1/3 probability of making a profit of ￡500,000 but a 2/3 probability of making nothing.

In most cases, individuals will pick the less risky option.

9.??Declinism

Declinism bias is when view the present or future in an excessively negative light, and romanticize the past in a positive light. Following this, it leads us to believe that everything is worse than it used to be in the past.

Example:

An organization has recently lost a considerable amount of profit and investors following an incident. Its employees struggle to stay positive and cannot help but irrationally see the present and future as excessively negative, and the past with a rose-colored lens (even though they experienced a non-strategic bankruptcy or other dilemma in the past).

10.???Availability Cascade

The availability cascade is when a certain idea or story is increasingly known in public, thereby becoming more credible and spreading it further.

Example:

A story becomes increasingly known among employees in company: “I heard someone in the break room saying that our wages are going to be cut”.?The story becomes more credible and real, and spreads further, like wildfire.

Concluding remarks

Cognitive biases threaten our ability to make impartial split-second decisions, something that is valuable to most if not all businesses. Though it may not be possible to completely prevent these biases, acknowledging that they exist is the first step to preventing detrimental effects. Be sure to challenge your old beliefs and expand on your knowledge using different perspectives. Decision-making frameworks such as the SPADE (Setting, People, Alternatives, Decide, and Explain) toolkit work well in improving decision-making and limiting bias within the workplace.