Is cognitive bias affecting your business decisions?

To err, as they say, is human. For a species capable of making so many sound, well-informed decisions, we’re also guilty of some pretty bad choices that fly in the face of logic and evidence.

You weigh carefully the pros and the cons. You read up to stay informed. You ask people you trust for advice, then reflect on what you’re told. As an effective leader, you’ve perhaps developed your own water-tight technique that guarantees you make the right choices.

Spoiler alert! The choice you make will be neither right nor wrong. It will be the choice dictated to your brain by a formidable force: cognitive biases, slight distortions in our individual perception of reality. Our decisions are not always as objective, as rational or as logical as we’d like to believe.

So how can we overcome these ‘bugs’ in the code within our brains? How can we make better decisions for ourselves and for our businesses?

Being aware of these biases is the first step towards defeating them. So, let’s make ourselves aware. Let’s explore some secrets of the brain that impair our business decisions.

Your accountant is probably well-placed to identify some of your biases, as he or she has a front-row seat to the consequences of your business choices and can quantify their ‘correctness’. A 2012 study of SME accountants (here, in French) offers the following conclusions:

1. Cognitive bias is a reasoning mechanism that can distort your judgement.
2. It can have a lasting effect on your business’s growth.
3. Cognitive biases can conceal themselves well; whatever your choice, you will believe it to be more objective than the reality would, in fact, suggest. This is particularly true in times of uncertainty.

Imagine you’re looking to start a foodtruck business. You go online and find a suitable second-hand truck priced at €20,000. You negotiate with the vendor and manage to agree on €15,000. Afterwards, you find out that the vendor paid €15,000 for the new truck two years ago.

What happened? The vendor relied on your anchoring bias, your tendency to be influenced by the first piece of information you heard (i.e. the asking price). Your brain associated this asking price to the real value of the truck. You thought you’d negotiated a bargain, although in reality you could have paid a much lower price.

You’re searching for a premises to open your jewellery boutique. Your friends tell you of an available store in a charming, Bohemian district that might be perfect. But you remember reading a newspaper article about a spate of robberies in that area a year or so ago. You decline to visit the premises, which is eventually snapped up by a competitor who, one robbery-free year later, has a constant queue of customers snaking around the corner of her shop.

What happened? You have estimated the probability of something happening in future (being robbed) based on the past examples that came to your mind. Your recollection of the crimes reported in the newspaper meant you turned down the opportunity without carrying out thorough market research. It’s the same reason people may avoid the sea after a recent shark attack, or avoid flying after hearing of a plane crash on the news. Both are extremely rare occurrences, but they remain occurrences that you remember.

You’re launching a new organic cosmetics product that, personally, you love. Some members of your family tell you your hand cream is a stroke of genius, that it doesn’t matter that you don’t have the certificate to prove it’s organic, and that it will sell like hot cakes anyway.

You sell some tubs of cream but nowhere near the volume you’d been expecting. The same members of your family say your customers don’t know a good thing when they see it and that you should consider changing target.

What happened? You have fallen victim to your confirmation bias, which means you add extra weight to those opinions that reinforce what you already thought. Because of confirmation bias, you may tend to ignore opinions that contradict your own.

You created a brand of powder-based smoothies two years ago and have always remained convinced of its strong market potential. When a well-known beverage maker launched its own powder-based meal bottles recently, it reinforced your optimistic outlook. The problem is that it’s not customers who are banging on your door to get their hands on smoothies, but rather the bank and your suppliers trying to get their hands on late payments. Paradoxically though, the more alarming the signs and the numbers, the stronger your belief in your product becomes. You just know it will work one day. But it doesn’t.

What happened? You became caught up the escalation of commitment. Sometimes our determination to see a project succeed blinds us to the fact that it is destined to fail. We have a tendency to stick to our guns - especially when we declare our optimism publicly - because we have invested so much time and/or energy, even when reality suggests otherwise. The reason is that our brains don’t easily entertain the possibility that they’re wrong.

It’s the same bias that leads gamblers to continue to put coins into slot machines despite their dwindling resources. Related traps to fall into in the business world are the illusion of control and an excess of confidence.

To revisit the previous example, let’s imagine that you finally accept the failure of your powdered smoothie project. You regret the whole experience and are angry at yourself for persevering with it for so long. You soon have another idea - one that bears all the hallmarks of a runaway success - but you decline to pursue it because you fear experiencing that feeling of regret once again.

What happened? Regret, or more precisely the fear of future regret, can leave us powerless to make a decision; we worry that the decision we take will be the wrong one, one that we’ll eventually be sorry about. This cognitive bias works two ways: it can make us excessively risk-averse (we don’t act) or, conversely, more open to taking risks (we do act because of ‘FOMO’, the fear of missing out). Thus, regret theory can distort the rational judgement of an investor, for example, or a purchasing manager choosing a supplier.

A post on LinkedIn catches your eye: “Nobody helped me. I succeeded purely because of my own discipline, motivation and incredible determination.”

Something doesn’t sit right with you. Of course, you say, the person must have been helped, or been lucky.

Let’s say the shoe is on the other foot: you’re proud of one of your successes and believe that the positive result was purely down to you and you alone. You believe you deserve all the credit. This is self-serving bias in action.

What happened? Self-serving bias causes us to take all the plaudits when things go well but to blame outside factors when things go wrong. It’s a bias that protects our self-esteem - it’s important to have faith in ourselves and in what we do - but it also leads us into blaming other people for our own mistakes. Overcoming this bias allows us to ‘own’ our mistakes and learn from them.

Dismantling our cognitive biases starts with being aware they exist in the first place. Then, we can see them coming and prepare to avoid their damaging effects. Second-guessing our own brains isn’t easy but there are certain methods that help. What follows is a selection:

Always try to imagine two alternatives to each main decision you make. Once you’ve defined the three possible outcomes, ask yourself these questions:

• What are the advantages of this decision?
• What will you miss out on if you take that particular path?
• What will be the consequences of this choice for my business?
• What resources do you have at your disposal should things go wrong?

One tip that might prove useful is to imagine someone else - somebody whose judgement you respect - answering these questions for you.

The escalation of commitment is especially strong when a rival does much better than ourselves, or when the market doesn’t match the goods or services we offer. Our fear of failure causes us to ‘hang on in there’ and not waste the effort we’ve invested. How can we overcome this?

• By accepting that our failures don’t define us. Our project may have been unsound, but that doesn’t mean we are.
• Analyze what it is you’re lacking and set about obtaining it. Do you need to publicize more? Could you tweak your product or your service?
• Don’t be afraid of going back to square one. Start with a list of all the things you’ve learned by building your business so far. This may help you past Regret Aversion. You can also take these insights into a new venture.

Self-confidence is an essential ingredient of continued success. Yet, very few grand plans come to fruition without the help of those around you. That could mean consulting your target market or carrying out surveys among your existing clientele. You can ask them the questions you don’t wish to ask yourself, such as:

• What are the weaknesses in your idea?
• What will be the consequences of your decision?
• What could go wrong?
• What are the strengths of the competition?

When looking at what others answer, remember the threat of Confirmation Bias. Don’t embrace only the answers you like and don’t ignore those opinions that contradict your own.

To boost your chances of being selected for a mission, you may decide to lower your prices, offer extra services for free or agree to work to tighter deadlines. That’s all well and good, but you’ll need to establish some boundaries.

• Set yourself an absolute minimum price that you will not undercut.
• Calculate the minimum time you’ll need to complete the mission. And put quality before rapidity.
• If you wish to propose another service, have an exact idea in advance of what it is and define the amount of time and energy you are prepared to invest in it.
• Write each boundary down and consider them all objectives to which you must remain faithful.

Thinking Fast and Slow - Daniel Kahneman, 2011

Outsmart Your Own Biases - Harvard Business Review, 2015

The 5 Biggest Biases That Affect Decision-Making (2019) - The SEEDS model - The NeuroLeadership Institute

61 Cognitive Biases That Screw Up Everything We Do - Business Insider