Have you ever wondered why some well-thought-out business decisions lead to undesirable outcomes? The answer might not lie in intelligence or knowledge but in the cognitive biases that subtly influence our decision-making process.
Human brains are hard-wired to take shortcuts to help us make decisions quickly. However, this efficiency doesn't necessarily mean we're more effective - and it can lead to common mistakes in thinking, known as cognitive biases.
In this blog post, I look at the top cognitive biases that could silently sabotage your business and explore strategies to mitigate their impact.
Imagine a rocket scientist trying to explain a complex space mission to a five-year-old. The scientist is at the top of their field and so used to talking technical jargon that they forget that the child may need help to understand them. The child doesn't ask for clarity for the risk of being considered stupid.
The result? A bewildered child and a frustrated scientist.
Whilst we may not be talking to children in our business, this scenario illustrates the "Curse of Knowledge," where experts use technical language, assuming that non-experts understand certain concepts, leading to miscommunication. This bias isn't just limited to interpersonal communication; it can also affect how we communicate with our customers.
To counter this, we need to simplify our messages, avoid industry jargon, and actively seek understanding from our audience. Encourage a culture where staff feel comfortable asking questions when they don't understand something.
2. Corporate Amnesia: The Forgotten Lessons
The aftermath of the 2008 financial crisis saw a mass exodus of experienced and skilled employees as many companies offered severance packages or restructured in a desperate bid to remain afloat. However, the valuable corporate knowledge held by these employees went with them. This is known as Corporate Amnesia. Unfortunately, history seems to repeat itself during current economic downturns.
To prevent this, companies must create a culture of learning from past experiences, documenting best practices, and encouraging team members to discuss mistakes and failures. After all, those who cannot remember the past are doomed to repeat it.
Put yourself in the shoes of a pirate holding a treasure map. You know there are risks in the journey ahead, and the lure of the treasure is hard to resist. Even though these risks can be minimised, the fear of potential losses is holding you back.
Loss aversion is a powerful cognitive bias that causes individuals to feel the sting of loss much more intensely than the pleasure of gain. The pain of loss can be overwhelming, whether losing money, possessions, or even relationships. This bias leads people to prioritise avoiding losses over acquiring equivalent gains, making it more desirable to avoid losing £20 than to gain £20. In short, loss aversion can profoundly impact decision-making and must be considered by businesses seeking success.
Businesses can overcome this by conducting thorough risk assessments considering data and evidence rather than relying on intuition or hearsay.
To combat loss aversion, it also can be helpful to consider the worst-case scenario if a particular course of action is taken and how the business would overcome this word case scenario. This exercise can provide perspective and aid in making more rational decisions.
4. Endowment Effect: The Overvalued Product
The Endowment Effect can be a tricky cognitive bias to navigate. It's like the parent who insists their child is the best, even when faced with evidence to the contrary. Companies can fall into the trap of overvaluing their products or services due to this bias, leading to inflated prices and unrealistic expectations.
To overcome the Endowment Effect, businesses must objectively evaluate their offerings by regularly seeking customer feedback and cultivating a candid feedback culture. This means creating an environment where customers and team members feel comfortable sharing honest opinions about the product or service without fear of judgment or retribution.
It's also crucial to be cautious of sales tactics that promote psychological ownership. This can include using language that implies the customer already owns the product or making it difficult to return or exchange. Businesses must consider market prices when determining the appropriate selling price rather than simply valuing the product based on their attachment to it.
By remaining objective and open to feedback, businesses can ensure they provide high-quality products or services at a fair price. This benefits the customer and helps the company maintain a competitive edge in the market.
5. Availability Bias: The Recency Illusion
This bias is based on the principle that people rely on information that is easy to retrieve when forming opinions and beliefs. People tend to recall recent vivid memories more quickly, but several factors influence how well they remember things. For example, individuals who know several successful startups are likelier to overestimate the percentage of startups that succeed, even if they have read statistics to the contrary.
Similarly, people fear plane crashes more than car accidents, even though the latter is more common, as plane crashes are more vivid in the media and in our imaginations.
6. Survivorship Bias: Success Factors Illusion
Survivorship bias is a common pitfall that many businesses fall into while analysing data. It is the tendency to focus only on successful outcomes and ignore the failures. This bias can lead to inaccurate conclusions and ineffective decision-making. Business leaders may model their strategies solely on successful companies, ignoring the many examples of companies that tried the same thing but failed. This can be compared to trying to replicate a winning lottery strategy solely by analysing what lottery ticket winners did to win.
To avoid survivorship bias, businesses must evaluate all available data, not just the successes. They must also be aware that success is not always an indication of skill, and failures are only sometimes an indication of incompetence. Evaluating successes and failures can provide valuable insights into what works and doesn't. By considering the losses, businesses can learn from their mistakes and make better decisions in the future.
Furthermore, businesses must be willing to take calculated risks and try new strategies, even if they have failed. Failure is not always a sign of incompetence but can be a stepping stone to success. By avoiding survivorship bias and embracing failure as a learning opportunity, businesses can stay ahead of the curve and achieve long-term success.
The Anchoring Principle can be compared to the first stroke of paint on a blank canvas, setting the entire artwork's tone. Similarly, the initial proposal in a negotiation can set the tone for the whole process. To achieve successful negotiations, companies must recognise and consider this bias. They should be mindful of the initial proposal and take steps to ensure that it does not unduly influence subsequent discussions. This may involve conducting thorough research and preparation, setting clear objectives, and being willing to walk away if necessary.
By understanding and mitigating the Anchoring Principle, businesses can improve their negotiation skills and achieve more favourable outcomes. They can also avoid the pitfalls of short-sighted decision-making and create a culture of thoughtful and strategic planning.
To overcome the Planning Fallacy bias, businesses must consider all possible obstacles and challenges that may arise during a project. This requires careful planning, research, and a willingness to be flexible and adapt as needed. It also requires a culture of transparency and accountability, where team members feel comfortable raising concerns and sharing their expertise. Many businesses skip proper planning because they believe it is not worth the investment in time; however, in practice, in many circumstances, investing time in planning saves significant time in the effects of poor planning.
By acknowledging and addressing the Planning Fallacy bias, businesses can improve their planning processes and achieve more successful outcomes. They can also create a more productive and efficient workplace that fosters innovation and growth.
The extrinsic incentive bias can harm businesses, leading to a demotivated and disengaged workforce. While monetary rewards, job security and awards may seem like an easy solution for motivating employees, they often fail to address the underlying factors that drive employee engagement. Intrinsic rewards, such as personal growth, seeing the outcome of work and a sense of purpose, significantly impact employee motivation and job satisfaction.
Businesses must recognise the importance of intrinsic rewards and strive to incorporate them into their employee motivation strategies. This can involve providing opportunities for personal and professional growth, recognising and rewarding achievements, and fostering a sense of community and purpose within the workplace. When balanced with extrinsic rewards, such as bonuses and benefits, these intrinsic rewards can create a more engaged and motivated workforce, ultimately benefiting the business. Companies can create a workplace culture that fosters employee growth, satisfaction, and productivity by prioritising extrinsic and intrinsic rewards.
10. Disposition Effect: The Premature Sale
The disposition effect is a common cognitive bias among investors that can lead to suboptimal decisions. Essentially, it causes us to sell assets that have already made profits too soon while holding on to losing assets for too long. We prioritise ensuring a profit on our winning investments, whereas we hold on to the losing ones, hoping they will eventually become gains. This bias can be particularly harmful in investing, where making the wrong decision can have serious financial consequences. By recognising the disposition effect and actively working to counter it, investors can improve their chances of making sound investment decisions and achieving their financial goals.
Bikeshedding, also known as Parkinson's Law of Triviality, is a common pitfall in project management where a team spends excessive time on minor details while ignoring crucial aspects of the project. This can lead to a waste of resources, time and a significant drag on productivity.
Bikeshedding is based on the idea that people focus on what they know best. For example, team members may be more comfortable discussing the colour of a bike shed than the overall design of a house. Unfortunately, this can result in team members becoming bogged down in trivial details rather than focusing on the critical aspects of the project.
To avoid the pitfalls of bikeshedding, businesses must establish a culture of efficient prioritisation. This means setting clear objectives, defining priorities, and establishing a process for decision-making. It also means creating an environment where team members feel comfortable raising concerns and challenging assumptions. Businesses can achieve more significant results in less time and with fewer resources by focusing on what matters most.
Bikeshedding is a common pitfall in project management that can significantly impact productivity. By recognising the phenomenon and establishing a culture of efficient prioritisation, businesses can ensure that their projects stay on track and achieve the desired results.
The IKEA effect is a cognitive bias that is commonly observed in the business world. It occurs when a project or product developed in-house leads to an overvaluation of its worth. This bias can result in excessive investment in projects that may not meet the necessary standards. It is similar to the tendency to value a piece of IKEA furniture more because of the effort put into assembling it.
To make informed decisions, businesses should objectively evaluate their projects, regardless of their origins.
13. First Impression Bias: The Lasting Perception
Studies have shown that first impressions during job interviews have a weak correlation with on-the-job success, highlighting the importance of evaluating candidates over time. Additionally, businesses should strive to create a welcoming and inclusive environment that allows diverse perspectives and talents to thrive rather than relying solely on first impressions. By recognising and mitigating the First Impression Bias, businesses can avoid potential hiring mistakes and build stronger relationships with customers.
For instance, marketing myopia may cause companies to prioritise making a quick sale rather than investing in customer loyalty and engagement. Whilst this may be effective in the short term, this can lead to a decline in customer satisfaction and ultimately hurt the company's bottom line. Similarly, businesses that need to conduct proper research before predicting growth may find themselves ill-equipped to handle unexpected changes in the market.
To avoid marketing myopia, businesses must prioritise long-term objectives and focus on building sustainable relationships with customers. This may involve investing in customer education and engagement, conducting thorough market research, and staying up-to-date on industry trends and best practices. By taking a more strategic approach to business, companies can avoid the pitfalls of short-term thinking and build a strong foundation for long-term success.
Surrogation is a cognitive trap businesses can fall into when focusing solely on meeting measured targets instead of improving the underlying processes that drive performance. This leads to a narrow focus on numbers rather than actual performance.
Research on performance measurement in management accounting has identified surrogation as "the tendency for managers to lose sight of the strategic constructs the measures are intended to represent, and subsequently act as though the measures are the constructs". So, businesses must prioritise improving those underlying processes instead of solely focusing on the numbers.
So, why not start a conversation within your business about tackling cognitive biases? How do you ensure these hidden traps don't lead your business astray? Let's work together to combat these biases and create a more rational and effective business.