How To Make Better Decisions? Tips on how to outsmart the most current cognitive biases
Juana-Catalina Rodriguez
?? Innovation Strategist and Advisor | Keynote Speaker | Board Member | Entrepreneurship | Sustainability | Impact & Circular Economy | 3x Award-Winning Author |
Starting a new business from scratch has never been easy and is not recommended for faint hearts.
The truth is that decisions are human-based, fraught with inherent biases that affect our judgment’s quality.
I recall telling myself,
"Of course, we will do it faster than everyone else."
"This is not working, but we can't stop. We had spent one year working on it or looking desperately for data that confirm my way."
Our mind's bias is called "cognitive bias," a systematic error in thinking that occurs when people favor their personal experience in a decision without properly putting it on the merit scale.
Our human brain is a powerful tool, but you can easily handicap it. Cognitive bias is a byproduct of the brain where the brain uses previous data and experiences to make the decision quicker and simpler.
This decision is influenced by internal beliefs, past experiences, social pressures, individual motivations, and emotions, limiting our ability to think clearly.
Unfortunately, when it comes to interpreting information and making objective sense of reality, human brains are hard-wired to make all kinds of mental mistakes that can impact our ability to make rational judgments.
To make better decisions as entrepreneurs, we need to understand these biases to mitigate their effects. Therefore, we mustn't fall into the cognitive bias trap our brain sets up for us.
According to research by Kahneman and Tversky [1], the brain works in two possible ways:
Most biased decisions are based on the fast way taking over the slow way.
The two psychologists ascertained that most untrained minds' decisions act upon heuristics, "common-sense rules," which often side with a shortcut and illogical methodologies. This is because it is easier for the brain to process, and therefore, it takes the path of least resistance.
However, this least resistance path often doesn't have questions that help you avoid a biased decision. So let's take a look at the most common ways your brain tricks you as an entrepreneur into making decisions based on cognitive bias and methods to outsmart these shortcuts.
Planning Fallacy
“Of course, we will do it faster than everyone else. The product will be launched in 6 months.”
I recall this one time. We worked hard to pitch a new idea to an innovation board. Finally, we had all the charts, graphs, and an awesome PowerPoint. Finally, we were ready to present the work predicted for the next six months.
We flowed seamlessly in that boardroom meeting and claimed that the product's first version would be ready in six months. The pitch was to get funding for the development of 1st MVP (minimum viable product). The presentation was excellent, but not every soul in that boardroom believed in our planning. We were told to go back and rework our timing targets for the next board meeting. This is a classic example of fallacy planning, overestimating our team's capability.
We as entrepreneurs have a natural tendency to set up unrealistic deadlines and fall short once we go into the practical sphere. Unfortunately, car-making tycoons have made the same mistake.
Another example is the Sydney Opera House construction [2] which was expected to take four years. It took 14 years.
Innovators who are defining a timeline for themselves often create unrealistic planning because of this fallacy biased.
This bias can kill a project as investments start melting once the actual timeline exceeds the proposed one. It is the most common mistake as we do something that has not been done before and has no reference.
How to outsmart Fallacy Planning?
Murphy's Law should be your thumb rule as something will go wrong.
Therefore, you should always consider a tire change time once allocating timelines.
The timeline decisions should be based purely on logical calculations rather than your historical ability to carry out a specific job or task, check to discuss with others, and benchmark other projects' timing.
You can use timeline software. In my case, I use excel with concrete documentary evidence to back my timeline. But, of course, you must always add 'fat' or extra time to cater to unforeseen delays that you know nothing of while starting.
Sunk-Cost Fallacy
“We had invested five years working on this product. We can’t stop now. We need just another year.”
This phrase is a classic from my fieldwork with intrapreneurs. The sunk-cost fallacy happens when you have invested in a project or product for a long time without success, and you are still willing to wait and spend more even if the evidence confirms that the project will not take off.
The problem with waiting for a dead project is that it costs money exponentially. However, our brains make us believe that everything will go fine even if logic is in our face defying our thought process.
Sometimes, a never-give-up attitude is the start of your downfall. You think all you need is to push a little more, whereas the wall never budged from the very beginning. Once you start working on a specific project, you develop an emotional bond over time which is very difficult to let go of.
Remember that an idea's success is not always directly proportional to the amount of money or time you spend on it.
How to outsmart Sunk-Cost Fallacy?
The first question you should always ask while initiating a project is worth putting all eggs in one basket. Once you do this, cognitive bias settles in, and you decide to stay in longer rather than pull out earlier.
Testing different approaches “eggs” quickly is also a way to validate some hypotheses before going mainstream. Dream big, but start small.
The second step of overcoming this bias is understanding the relationship between success and investment of time/money.
To ensure that Sunk-Cost Fallacy doesn't kill your venture, you need to keep evaluating your ideas, goals, milestones, and outcomes in a specific period. Then, you can establish relevant KPIs (key performance indicators) that will enable you to track actual progress and adapt, change, or pivot.
Confirmation Bias
“We seek for all data and stories that reaffirm the need for this new offer. All signs point to YES.”
Really all signs?
We often look at prepositions the way we want to by focusing on data that support our qualitative and quantitative estimates and ignore some against our position as competitors, time to market, forecast estimates.
You can also remember some meetings where your mind was made up before the first word was already spoken. Therefore, the information presented in the meeting was useless as your decision was already made.
Confirmation bias causes founders, project managers, and product owners to latch onto information confirming pre-existing beliefs and dismissing negative information. This bias can lead to a venture's death by causing the founder to ignore critically important information and fix the nuggets supporting his project.
We interpret data as we want to see it and make decisions based on that, which is a recipe for disaster. We also include our pre-existing beliefs into the mix, making things worse. We miss out on important information that allows us to make better decisions instead of biased ones.
How to outsmart Confirmation Bias?
The best way to steer away from this is by having a diversified team that can see problems and solutions differently.
It would help if you kept an open mind for the team members to come to you and relay the short or long-term problem with your plan or decision. If you don't have a team, you may have friends mentors; look for other perspectives.
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You can refer to these hiccup guys as the “devil’s advocate”.
They usually come up and tell what may go wrong. They are generally not liked since they go against confirmation bias, but if you have to survive as an entrepreneur or an intrapreneur, this is of the absolute essence.
David Kahneman [3] Nobel prize-winning psychologist, recommends assuming that your hypothesis is wrong from day one and searching for an explanation of why which makes us more willing to accept contradictory information.
Optimism Bias
“That will never happen to me.”
It is good to see the glass as half full, but the fact is that it is half full and half empty at the same time. Many innovators work on their projects and make their data plus decisions. This leads them to think that nothing can ever go wrong.
Well, sorry to burst your bubble, but something always does go wrong. This leads to risky decisions based on optimism bias. However, this habit pattern has hit people with flourishing businesses because their decisions have been correct.
How to outsmart Optimism Bias?
Since this bias makes you believe that you are less likely to suffer from a bump in the road, the first thing to fix is this thought process. First, accept the fact that you are as human as everyone else, and bad things can happen to you and your startup even if you have prepared well.
Always find loopholes in your system or weak links. You never know when correcting a small mistake can help you save the whole card house from falling flat on your face or the floor!
Gary Klein, in his?Harvard Review?article?"Performing a Project Premortem"?[4], describes a premortem process that assumes that the "patient" has died and asks what went wrong. The team members' task is to generate plausible reasons for the project's failure.
Halo Effect
“Love at first sight.”
The Halo Effect [5] is where the perception of a person rather than an old memory or decision hampers your ability to make the right call. Your overall impression influences how you feel and think about his or her character and then make a move accordingly.
The halo effect works in both positive and negative directions:
An example, physical attractiveness influences how you rate someone over other qualities. However, it is also affected by non-physical qualities and situations like niceness or intelligence.
I recall a story when our efforts went down the drain while we made a new project pitch. The program was a new service in the retail segment, taking about 12 months to implement.
I presented this project when I was 8-month pregnant. Unfortunately, the panel declined the collaboration due to technical reasons. However, a customer insider confirmed that my absence for the next months played a significant role.
The decision-makers fell into the Halo Effect biased decision-making trap of seeing a pregnant woman presenting a project.
How to outsmart the Halo Effect?
The best way to keep the Halo Effect out of the equation is to keep the person with a conflict of interest outside the decision-making circle.
He or she can advise but should never be in an authoritative position. If this is the case, the decision will always be based upon individual success rather than organizational glory.
As this is not always possible, another key to managing the Halo effect is that it reminds us that first impressions count and considers potential bias.
In my story, it was clear that a detailed plan of my replacement during maternity leave and the team would have reduced this halo effect.
Anchoring Bias
“How much information is good enough?”
Most decisions are based on information that you have or receive. However, there is a thin line on how much information is good enough.
Deciding on the first piece of information is a foolish act and has no comparison to deciding on minimum possible info due to lack of time.
This decision based on the first piece of information leads to anchoring bias. Anchoring bias [6] tends to rely too heavily on the first piece of information you learn.
For example, when you buy a house, you learn that the average price in your targeted sector has a certain value; you will believe that any amount below is a good deal. You can also think that this figure is key to starting a negotiation process as the first number will "anchor" the subsequent agreement.
How to outsmart Anchoring Bias?
Making decisions is the trait of market leaders. Moreover, deciding on the first information is never recommended even by market leaders, let alone someone who is just starting.
You need the services of a “devil’s advocate,” who can make you delay the decision based on lack of information.
This can also be a market expert or external source rather than a company employee who may nod in sync with you because his investment or time is not at stake. Therefore, always wait for the follow-up information and, as a rule, for your project.
You will never know how much information is enough, but you must go out and check other sources, exchange with market experts, and be sure you don't anchor to that first piece of data.
The End Game
Cognitive biases distort our regular judgments as product managers, entrepreneurs, and innovators.
This is also the case when we look for information aligned with our own beliefs. If we have multiple paths available, we tend to take the one that coincides with our pre-defined variables.
As a result, we often fall victim to tunnel vision and follow one direction rather than discover different solutions for the same problems.
One of the most important critical thinking aspects is being aware of these cognitive biases and avoiding them when they rush you into making biased (usually wrong) decisions.
Great innovation and outstanding projects will follow if we recognize and outsmart these biases.
We need to analyze every situation and make the right decision based on data rather than historical patterns. If we do not do that, we degrade the decision-making process, which degrades the outcome's quality.
Have you faced any of the cognitive biases discussed in this article?
Please share your story in the comments section to help someone in the same situation.
References
[1] R. T. Cass R. Sunstein, "The Two Friends Who Changed How We Think About How We Think," The New Yorker, 7 December 2016. [Online]. Available:?https://www.newyorker.com/books/page-turner/the-two-friends-who-changed-how-we-think-about-how-we-think.
[2] Sydney Opera House, "Interesting facts about the Sydney Opera House," [Online]. Available:?https://www.sydneyoperahouse.com/our-story/sydney-opera-house-facts.html.
[3] O. Burkeman, "Daniel Kahneman: 'We're beautiful devices,'" The Guardian, [Online]. Available:?https://www.theguardian.com/science/2011/nov/14/daniel-kahneman-psychologist.
[4] G. Klein, "Performing a Project Premortem," Harvard Business Review, September 2017. [Online]. Available:?https://hbr.org/2007/09/performing-a-project-premortem.
[5] J. C. Jakob Nielsen, “The Halo Effect,” 9 November 2013. [Online]. Available:?https://www.nngroup.com/articles/halo-effect/.
[6] P. Staff, "The Anchoring Effect and How it Can Impact Your Negotiation," 26 November 2019. [Online]. Available:?https://www.pon.harvard.edu/daily/negotiation-skills-daily/the-drawbacks-of-goals/.