COMMON COGNITIVE BIASES AND HOW THEY TRIP YOU UP

Cognitive biases are pernicious, subversive and ubiquitous. Until you become aware of them and how they impact your decision making process you are at risk of making costly mistakes in your daily life and business.

While the list of cognitive biases presented here (Confirmation Bias, Availability Bias, Anchoring Bias) is by no means exhaustive, the goal here is to introduce you to some of the most common ones along with their associated heuristics and point out strategies to help you overcome them. The fact is, just being made aware of these biases can be protective so let’s get started.

CONFIRMATION BIAS

Confirmation Bias is in the news a lot since the last US Presidential Election. Confirmation bias is the tendency to favour information that confirms our beliefs and dismiss information that disconfirms our beliefs. The problem with confirmation bias is that you selectively filter what information you choose to pay attention to and value. So, not only will you actively look for evidence and seek out experts that confirm your existing beliefs, but even more perniciously, you'll hide from or discredit any information that contradicts your viewpoint. An example of this is that people on the right of the political spectrum tend to watch Fox news because it confirms their beliefs and people on the left watch MSNBC or CNN because it confirms theirs.

One explanation for why we have this bias is that we don’t like being wrong. It doesn’t feel good when we find out we’re wrong, and so we rationalize or ignore new evidence that is inconsistent with our prior held beliefs. The risk is that if you are not considering or are downplaying evidence that goes against your position, you’re not giving full consideration to all available evidence. This can lead to overconfidence, drawing the wrong conclusions and eventually making poor decisions.

A prime example of the perils of confirmation bias is when food giant Quaker Oats decided to buy Snapple. This is arguably one of the worst business decisions ever made. In 1994, Quaker bought Snapple for $1.7 billion only to turn around and sell it just three years later for $300 million. That is a remarkable devaluation (close to 500%) in a remarkably short timeframe.

A lot of things went wrong post acquisition but many of these were foreseeable. Quaker bought Snapple as sales growth in the category of “niche drinks” was slowing and competition from industry giants Pepsico and Coca-Cola was ramping up. Quaker also messed up Snapple’s distribution channels as they tried to force their distribution model designed for supermarkets and mass merchants on a business where the lion's share of sales were at convenience stores and similar small outlets. William Smithburg, the CEO of Quaker said later about the acquisition: “There was so much excitement about bringing in a new brand, a brand with legs. We should have had a couple of people arguing the ‘no’ side of the evaluation.” Smithburg clearly recognized after the fact that he and his organization had been caught out by confirmation bias.

Overcoming Confirmation Bias

A good practice when you are making a strategic decision is to think of alternatives to your proposal and explain their pros and cons. Seriously consider the alternatives and actively look for information that would disprove your main hypothesis. Considering objections is an important step in this process. Identifying the three strongest objections to your proposal and then defending your position against these is a good strategy. The point is to seek out information that does not corroborate your position.

AVAILABILITY BIAS

Availability bias is the tendency to confuse how easy something is to remember with how common it is. This causes us to form false beliefs because it causes us to give too much weight to the evidence we remember, which in turn can blind us to other evidence. For example, we tend to judge the likelihood of an airplane crash to be higher than it actually is because plane crashes are widely reported in the media and so we remember the stories of plane crashes - often vividly. The associated heuristic (recall that heuristics are shortcuts in reasoning) leads us to confuse the ability to easily recall plane crashes with their true probability. The fact is the odds that your upcoming flight will crash are ridiculously low but we don’t so easily recall the huge number of successful and mundane flights the airline industry makes year after year. These latter statistics are of course relevant to the probability of future plane crashes.

So one of the harms of the availability heuristic is that it causes us to form false beliefs about the probability of an event and this can have significant implications for business decisions. The availability heuristic can increase or decrease the perception of risk and the likelihood of success associated with that risk.

Case in point: In 2005 Malcolm Gladwell, author of his then new book Blink: The Power of Thinking Without Thinking, was invited to deliver a lecture to a group of Lehman Brothers senior executives. Blink’s thesis, as you might guess based on the title, is about the benefits of making instantaneous decisions based on intuition. According to published reports Lehman’s president Joe Gregory was smitten with the idea of “going with your gut” and passed out copies of Blink to his small army of traders. Lehman Brothers then proceeded to make some of the worst snap investment decisions in the history of financial markets and in 2008 they collapsed and their bankruptcy wiped out more than $46 billion of its market value.

Now while we don't know to what degree Lehman Brothers' leadership group or traders employed Gladwell's core thesis in their business practices, nor can we say with certainty that availability bias was impacting those whom implemented this strategy, and while this may seem like a post hoc ergo propter hoc fallacy, it is at least prima facie a plausible recounting of the events.

When considering risk or reward we naturally recall our own experiences. And the more vivid the experience the more likely it will have an impact on our judgement (recall how the memory of a plane crash, even experienced through the media, or even just seeing a picture of a plane crash can impact our assessment of the risk of flying). If we think of the availability heuristic as a tendency to think and act based on a “gut feeling” and ignore the actual level of risk, the predicted outcome will often feel more likely than it actually is. After reading about many cases where success was achieve by going with your gut it is probable that Joe Gregory et. al were impacted by the availability bias.

Overcoming Availability Bias

Fortunately there are strategies to overcome availability bias and avoid similar outcomes. The next time you are facing an important decision or developing a business strategy ask your self why you believe your position will be successful. If you are modelling it after a strategy such as is explored in Blink, make sure you have understood the relevant similarities and differences between it and your particular circumstances. And finally make sure you seek out evidence of failed cases or instances.

ANCHORING BIAS

The anchoring bias is the tendency to rely too heavily, or "anchor," on one trait or piece of information when making an estimate or a decision. Evidence that humans are affected by this bias was established in a famous experiment done by psychologists Daniel Kahneman and Amos Tversky. They asked two groups of subjects to estimate the percentage of countries in Africa that are members of the United Nations. The first group was asked if this percentage was greater or less than 10%. The second group was asked if the percentage was greater or less than 65%. When each of these groups was asked for their estimate of what the actual percentage was, the average answer given by the two groups was radically different. For the first group the average answer was 25%. For the second group the average answer was 45%. So what's going on here?

When people are asked to estimate a probability or an uncertain number rather than try to perform a complex calculation in their heads they start with an implicitly suggested reference point, the anchor, and make adjustments from that reference point to reach their estimate. This is a heuristic. Now you might think in this case it's not just the number it was the way the question was phrased that biased the estimates. It is possible that the subjects were thinking that the researchers knew the answer and so their reference numbers were related in some way to the actual number. But researchers have replicated this experiment many times in many different ways. For example, instead of asking whether the % was higher or lower than a given number, researchers would spin a roulette wheel in front of the test subjects and ask was the % higher or lower than the number that came up on the wheel and they got the same results. The higher the number on the wheel the higher the estimate was. That is, their estimates were anchored to a number the test subjects knew was entirely arbitrary.

There are many types of situations in which you are likely to be affected by the anchoring bias in business. For example, there are situations where we are making an estimate such as working up a sales forecast or territory development plan and then there are more pernicious situations in which an intentional anchor is involved such as in a negotiation.

In a sales forecasting scenario there is a good chance you are making an estimation based on what has happened in the past. When attempting to project future sales you will likely start by understanding prior year's sales. The old numbers become an anchor which you then adjusts based on other contemporary factors. This approach is obviously better than a mere guess, and it may lead to a reasonably accurate estimate. However as we have seen, due to the anchoring bias we tend to give too much weight to past events and not enough weight to other factors. This is particularly harmful in situations where there may be rapid changes in the marketplace. In these cases, historical anchors can lead to poor forecasts and, in turn, misguided choices.

But not all cases of the anchoring bias are unintended. Because anchors can establish the terms on which a decision will be made, they can be used as a bargaining tactic by savvy negotiators. These intentional anchors are widely used in negotiation scenarios where a buyer might set a low floor or the seller sets a high ceiling. Make sure it is not you being negatively impacted by anchoring bias during negotiating!

There are various strategies available to help you overcome this bias and as is the case with all cognitive biases, just being aware of it helps.