Identify Cognitive Biases in Business Decision‑Making

What is cognitive bias?

The mental processes of how people think and problem-solve fall in the category of cognitive psychology. It explores how people acquire and use information to make decisions. Cognitive bias is a part of human nature. Such biases manifest in decision-making processes.

No matter how rational and pragmatic you might be, there is a range of cognitive biases that influence our brains to make decisions or judgments based on emotions or past events. Internal and external factors alike can shape our viewpoints and interpretations, directly impacting cognitive function. This means our brains start to take shortcuts to process information efficiently.

Cognitive bias can have a significant impact on how we make decisions. Unconscious bias can result in flawed reasoning, poor judgment, and ineffective problem-solving.

These biases tend to cloud our judgment, distorting our perceptions and preventing us from exploring alternative viewpoints and all potential options. They can impact how we process information and lead us to make choices based on biased thinking.

Cognitive bias also presents itself in marketing psychology making it an important factor in making business-related decisions.

Cognitive bias presents itself in various forms and aspects of life. Whether it’s deciding what to eat for dinner or choosing to enter into a business partnership, cognitive biases will come into play. Internal and external forces influence how businesses function and succeed. Here are a few cognitive bias examples in business:

Confirmation bias

We often seek answers that help us achieve goals or get the best results. Confirmation bias is the tendency to seek out information that confirms hypotheses. This type of cognitive bias leads to narrowing your focus in the search for confirmation rather than taking contrary evidence or explanations into account.

In business, you may have a hypothesis that you think will be proven correct but if you only look for supporting results your data won’t be entirely accurate or reflective of reality. Confirmation bias prevents us from considering all potential outcomes.

Anchoring bias

Anchoring bias refers to the strong reliance on initial information or figures. You might enter contract negotiations and the first offer sticks out. Anchoring bias happens when you take that first offer and make it your “anchor” or mental benchmark with which you make future judgments.

While your anchor may be a great first starting point, don’t let this piece of information cloud your judgment and deter you from future opportunities. Your anchor may become irrelevant or arbitrary, leading you to make decisions without adjusting your decisions based on other relevant factors.

Availability bias

This type of cognitive bias is the result of relying on easily recalled information. When making decisions, you recall the most readily available information relevant to your present situation. While these recollections can be helpful, they can also lead to distorted decision-making.

Relying only on available information won’t accurately reflect the full range of possibilities or risks in any given situation. In business, you may tend to lean on recent success stories because they are fresh in your mind. However, it’s important to not let availability bias distort your decision-making.

Overconfidence bias

When making decisions in business, it’s important to not become overconfident or cocky about your capabilities. Overconfidence bias is when you overestimate abilities or underestimate risks.

This is especially important to avoid in the business world to prevent problematic planning or failure to mitigate risks. You should be confident in your professional abilities but never so confident that you let it stop you from making rational judgments.

Bandwagon effect

Did your parents ever ask you, “If your friend jumped off a bridge would you follow?” This is the bandwagon effect. People tend to make decisions that follow trends. The herd mentality refers to the tendency of individuals to conform their beliefs or behaviors with the majority.

Rather than basing your decisions on popularity, carefully evaluate your options and make sure you aren’t hopping on the bandwagon just because everyone else is doing it.

Sunk cost fallacy

It’s hard to give up on a project you’ve already invested loads of time and money on. The deeper you get, the harder it is to walk away. The sunk cost fallacy refers to this concept – decision-makers continue investing resources in a failing project simply because they are already heavily invested.

Rather than objectively assessing the viability of a project, people tend to double down and invest more. This is a frequent occurrence in the business world but it’s important to learn when to walk away and stop this bias blind spot from clouding your judgment and decision-making.

Status quo bias

One of the most common cognitive biases is the status quo bias. Sometimes it’s easier to keep things the way they are rather than taking risks and making changes. People often resist change or avoid making decisions that change the status quo – even when the potential benefits outweigh the risks.

The status quo typically appears as the safer option but can hinder innovation. The greatest advancements in human history have come from making sweeping changes and taking massive risks.

Other cognitive biases

There are a plethora of cognitive biases that can impact the human brain. Other biases include:

• Actor-observer bias: The phenomenon of attributing one’s behavior to external factors while attributing others’ behavior to internal factors
• Attentional bias: Paying attention to only certain information and ignoring others
• False consensus effect: Overestimating the extent to which your own opinions are shared by others
• Hindsight bias: Believing that you “knew it all along” or overestimating your ability to predict the outcome beforehand
• Self-serving bias: Attributing successes to internal factors and failures to outside factors
• Negativity bias: Placing more weight on negative information or experiences
• Nonresponse bias: Occurring in survey research when there are systematic deviations between the individuals who responded and those who did not, resulting in a skewed representation
• Statistical bias: Systematic errors that distort results, generally a product of flaws in data collection, sampling, or analysis methodology

Making sound judgments results from understanding and mitigating cognitive biases – especially in the context of business.

The first step towards overcoming biases is developing awareness and active self-reflection. The more you are aware of common cognitive biases, the more you can reflect on how you react in certain situations and how you can overcome these biases.

Recognize that human judgment is often clouded by different types of cognitive bias. Learn to identify and reduce cognitive bias by fostering a culture of open communication. Your coworkers and employees should feel comfortable discussing potential biases and challenging each other’s assumptions. An open and constructive work environment will help you and your business grow and learn from previous decisions.

Another way to overcome bias in business is learning to identify key indicators of such biases at every stage of the decision-making process. Look for when the group comes to a consistent consensus without considering alternative options.

If everyone tends to agree without exploring other possibilities, you need to take more time for information processing and discussion. Watch out for contradictory evidence that is quickly ignored or dismissed. Avoid relying solely on anecdotal evidence rather than data. Consider how heavily emotions are influencing decisions.

Utilizing data and analytics to detect cognitive biases is an additional method for improving your company’s strategic judgment. A few ways to utilize data include:

• Identifying patterns or discrepancies
• Comparing decisions made under diverse circumstances
• Utilizing statistical analysis to identify biases
• Implementing objective metrics to evaluate outcomes
• Leveraging technology and machine learning

Rather than blame external forces, we can develop a decision-making framework to help combat unconscious bias. Focusing on critical thinking and self-awareness can help you increase your objectivity and take a strategic approach when making decisions.

From educating your team to promoting diverse perspectives, there are a plethora of options for developing a strategic framework for your business.

Define decision criteria and objectives

Creating a defined set of criteria and objectives will help prevent inaccurate judgments and ensure all relevant information is taken into consideration when making decisions. Your team should first determine which factors are most important, depending on the context of the given decision.

After determining the key elements such as cost, time, quality, etc., prioritize them based on the highest relevance and impact. It’s also important to define measurable metrics and benchmarks to objectively evaluate the criteria.

In terms of objectives, your team needs to outline desired outcomes. This helps you evaluate how each key factor will aid you in reaching your ultimate goal. These objectives should also be defined from multiple perspectives to ensure you have a well-rounded view of everyone impacted by the decision. This will ultimately enable decision-makers to align choices with the desired outcomes.

Collect and evaluate relevant data

Good decisions are based on collecting and utilizing new data and existing research. Avoid taking mental shortcuts and instead focus on leveraging relevant data. To avoid cognitive bias, identify your data needs and consider what relevant information will help you make more informed decisions.

Consider different types of data ranging from quantitative to qualitative, internal to external. Once you’ve gathered relevant data, use various analytic tools such as statistical analysis or data visualization to interpret and evaluate your findings.

Evaluating data provides a systematic and robust approach to making well-informed decisions. The more data you gather to support your decisions, the better you can avoid ignoring relevant information or making other mental mistakes.

Consider multiple scenarios and possibilities

Another aspect of developing a sound framework for making decisions is exploring multiple scenarios. Cognitive bias can lead to making quick and uninformed decisions.

For example, optimism bias can lead you to become overly optimistic about positive outcomes, causing you to ignore the likelihood of a negative event or outcome. Just like with confirmation bias, if you don’t consider all potential outcomes, you won’t be able to make a pragmatic decision.

Considering multiple scenarios and possibilities allows you to evaluate various outcomes and perceive potential risks or challenges. Seeking a more balanced view helps to make more realistic decisions which will ultimately lead to improved outcomes. Developing case studies is an effective way to evaluate different scenarios from past experiences.

Use decision-making tools and techniques

There are numerous tools and techniques for overcoming cognitive biases. Implement these tools in your business to help teams become better equipped when making critical decisions:

• Cost-benefit analysis: Assess the potential costs and benefits of the decision or project. Giving monetary value to various advantages provides decision-makers with a deeper understanding of the financial implications of their choices. Considering the various costs and benefits provides perspective and helps teams reevaluate the steps needed to reach their goals.
• Scenario analysis: As mentioned previously, it’s vital to consider various scenarios before making a decision. This technique involves analyzing diverse hypothetical scenarios to help decision-makers visualize the impact of their decisions in different circumstances.
• SWOT analysis: This framework requires evaluating strengths, weaknesses, opportunities, and threats. This is a common strategy used for evaluating internal and external factors and helps provide a holistic view surrounding the decision at hand.
• Decision matrix: This tool is used to compare options based on various criteria. Simply create a table with all potential options listed in rows next to relevant criteria. Give each option a score based on their performance against each criterion. This scoring system indicates which options have the highest potential of success related to each criterion.

Implementing effective strategies to reduce cognitive biases

Cognitive bias is the brain attempting to create mental shortcuts for making decisions quickly and efficiently. One way to combat cognitive bias is to slow down your thinking and take ample time to consider all possible options. We make hundreds of decisions every day, most of which without giving a second thought.

However, making decisions in business should be done deliberately and with care. Business decisions can have huge repercussions and lasting consequences so it’s crucial to go through options methodically. Slow down and ensure you are thinking rationally and calmly when making decisions.

Another effective strategy for reducing cognitive bias is conducting a pre-mortem analysis. This strategy involves identifying potential risks, failures, or weaknesses before making a decision.

Imagine a future scenario in which your project fails and then work backward step by step to discover what could potentially lead to failure. This method allows the team to proactively identify potential problems and make adjustments to the plan before making critical decisions.

Similarly, you should place heavy emphasis on critical thinking and rationality. Question your assumptions and cognitive biases. Human thinking is always impacted by personal beliefs and experiences. Self-reflection helps you identify cognitive biases and evaluate how your beliefs, experiences, and preconceived notions influence your judgment and decision-making.

Promoting a culture of psychological safety is key to reducing cognitive bias in the workplace. Fostering an environment of open communication enables your team to feel comfortable expressing their thoughts, experiences, and concerns. The more open and collaborative your work environment is, the better you can avoid cognitive bias.

It’s important to foster trust and respect, encourage active participation, embrace constructive criticism, and acknowledge and learn from mistakes. Establishing channels for open communication encourages transparency and collaboration in the workplace.

The role of diverse perspectives and external feedback in identifying biases

It’s not always easy to identify cognitive biases and the impact they have on business decisions. However, understanding diverse perspectives and remaining open to consistent external feedback helps us continually reflect and overcome cognitive bias.

Gathering audience insights and customer data is another effective approach for identifying cognitive bias. Understanding customer perspectives and experiences provides insight into how you should develop and innovate your marketing strategies.

Smart decisions will lead your company to success. Understanding how to make decisions while avoiding cognitive bias and incorporating diverse perspectives will set your company apart. Discover Mailchimp resources to help your business thrive with everything from A/B testing to the Customer Journey Builder and more!