Chapter 2
Cognitive biases in decision making
A cognitive bias is a way of interpreting and acting on information that is not strictly rational. For example, you might hire a candidate for a job because they went to the same school as you. There are many types of cognitive bias – with both positive and negative consequences – so it is important to understand how they work.
When to use it
- To understand how you make decisions, so that you can avoid making bad ones.
- To understand how others reach their point of view in discussions.
- To influence the decision-making processes in your organisation.
Origins
While there is a long history of research on cognitive biases, most people agree that the ‘fathers’ of the field are psychologists Amos Tversky and Daniel Kahneman. During the 1960s they conducted research seeking to understand why people often made flawed decisions. At that point in time, most people believed in ‘rational choice theory’, which suggested that humans would make logical and rational deductions based on the evidence available. However, Tversky and Kahneman showed conclusively that this is not so. For example, when faced with the prospect of losing £1,000, individuals become very risk-averse; whereas the prospect of winning the same amount of money encourages them to become risk-takers. This insight, among many others, helped them to develop an entirely new way of looking at decision making. Humans don’t use algorithms, in the way a computer might. Rather, they use heuristics, or rules of thumb, that are simple to compute but introduce systematic errors.
Kahneman and Tversky’s experiments spawned an entire stream of research that spread beyond psychology into other disciplines, including medicine and political science. More recently, the field of economics embraced their ideas, resulting in the creation of behavioural economics and the awarding of the Nobel Prize in Economics to Kahneman in 2002.
What it is
Cognitive bias is a general term used to describe the workings of the human mind that may lead to perceptual distortion, inaccurate judgement or illogical interpretation.
Cognitive biases come in many different forms. Some affect decision making – for example, the well-known tendency for groups to default into consensus (‘groupthink’) or to fail to see the truth in assembled data (‘representativeness’). Some affect individual judgement – for example, making something appear more likely because of what it is associated with (‘illusory correlation’), while others affect the workings of our memory – for example, by making past attitudes similar to present ones (‘consistency bias’). There are also biases that affect individual motivation, such as the desire for a positive self-image (‘egocentric bias’). The table below lists some of the most well-known examples of cognitive bias.
How to use it
The main way you use cognitive biases in the workplace is by being aware of their existence, and then taking steps to avoid their damaging side effects. For example, imagine you are in a business meeting and you are being asked to decide whether to go ahead with a proposal to launch a new product. Because of your knowledge of cognitive biases, you ask yourself a number of questions:
- Is there a reason to think that the people making the recommendation are suffering from bias, for example confirmation bias in their assessment of the potential market size, or are they trying to manipulate the group into a decision based on how they have framed the problem?
- Was there a high-quality discussion around the table? Did people have an opportunity to voice their concerns? Was the relevant information brought to bear on the discussion? Or did minority voices get drowned out?
On the basis of this analysis, it is your job to counter the biases that you think may be creeping in. For example, if you think someone is being selective with the data they are presenting, you can ask an independent expert to provide their own set of data. If you think a meeting has reached agreement too soon, you can call on someone to put forward a counter-argument. One of the most important jobs of the chairman in a meeting, in fact, is to be conscious of these potential biases and to use his or her experience to avoid egregious errors.
Much the same logic applies to other aspects of work in organisations. When discussing the performance of a subordinate, or when talking to a potential customer, you need always to be alert to the likely cognitive biases they have, and how these might get in the way of a good outcome. There are so many cognitive biases out there that it takes many years of experience to master this process.
| Name | Description |
|---|---|
| Framing | The relative appeal or value of an option or an item fluctuates depending on how it is presented. For example, we expect to pay more for a Coke in a 5* hotel than at a railway station vending machine. Context is key. |
| Confirmation bias | The tendency to search for information in a way that confirms our preconceptions and discredits information that does not support our view. |
| Fundamental attribution error | The tendency for us to overemphasise personality-based explanations for behaviours observed in others. If a driver in front of us swerves unexpectedly, our automatic reaction is to label him a ‘bad driver’, whereas in fact he might have swerved to avoid something lying on the road. |
| Availability | The more easily we can recall an event or a group of people, the more common we perceive these events or people to be. |
| Representativeness | When we are asked to judge the probability that an object belongs to a particular category, our estimate is based on how representative that object is of the category, and it ignores the underlying distribution. |
| Anchoring | Establishing the perceived value of something at an arbitrarily high or low level. This is commonly observed in negotiations, for example with a salesperson setting a high price and then discounting it, making us feel as though we have got a better deal. |
Top practical tip
Here is a specific tip for managing a meeting, put forward by Daniel Kahneman. Before a difficult decision has to be made, ask everyone around the table to write down their views on a piece of paper. Then, when it is their turn to speak, they have to say what they wrote on their paper. This avoids people being swayed in their opinions by what the person before them said.
Top pitfalls
It is possible to abuse your knowledge of cognitive biases by over-analysing things. In many business contexts, speed of decision making is important, so all the techniques described above are helpful but they can also slow things down a lot. The trick, as always, is about balance –the right blend of careful analytical thinking and intuition-based judgement.
The other big pitfall is that it is much easier to recognise cognitive biases in others than in yourself, so don’t make the mistake of thinking you are immune from bias. Ask others to guide you on this – task them to challenge your thinking, and to tell you if you are falling into one of the traps we have discussed above.