Cognitive Bias

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Description of Cognitive Bias. Explanation.

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Beware of cognitive biases...Definition Cognitive Bias. Description.


Cognitive Bias is a broad term for all distortions in the human mind that are hard to avoid and that lead to a perception, judgment, or reliability that deviates systematically, involuntarily, and rather distinct from the "reality" (after Rüdiger F. Pohl e.o., Cognitive Illusions, page 2-3).

A cognitive bias can also be described as a pattern of poor judgment, often triggered by a particular situation.

 

Some cognitive biases can be useful or even necessary, for example because they help to take more effective actions or enable faster decisions. This can be easily understood from an evolutionary context when our predecessors had to confront mammoths and Saber-toothed cats.

But other or sometimes the same biases are also causing problems in modern circumstances.

 

Types of Cognitive Biases

 

Some of the most important cognitive biases for managers are:

  • Hindsight Bias. The inclination to see past events as being predictable.

  • Fundamental attribution error. The tendency for people to over-emphasize personality-based explanations for behaviors observed in others while under-emphasizing the role and power of situational influences on the same behavior. See: Attribution Theory.

  • Rationalization. The process of constructing a logical justification for a decision that was originally arrived at through a non-rational decision process. Can be conscious, but is mostly subconscious.

  • Bandwagon Effect. The tendency to do (or believe) things because many other people do (or believe) the same. Compare: Abilene Paradox

  • Confirmation Bias. The tendency to search for or interpret information in a way that confirms one's preconceptions. Also called Confirming-Evidence Trap.

  • Status-Quo Bias. The tendency for people to like things to stay relatively the same. The preference towards alternatives that maintain or perpetuate the current situation even when better alternatives exist.

  • Self-serving Bias. The tendency to claim more responsibility for successes than failures. It may also manifest itself as a tendency for people to evaluate ambiguous information in a way beneficial to their interests.

  • Illusion of Control. The tendency for human beings to believe they can control or at least influence outcomes which they clearly cannot.

  • Overconfidence Bias. Overestimating the accuracy of our estimates or forecasts.

  • Prudence Trap. When faced with high-stakes decisions, we tend to adjust our estimates or forecast to be "on the safe side".

  • Recallability Trap. Giving undue weight to recent, dramatic events.

  • Sunk Cost Bias. To make choices in a way that justifies past choices, even when the past choices no longer seem valid.

  • Loss Aversion. The tendency for people to strongly prefer avoiding losses than acquiring gains.

  • Anchoring. When considering a decision, the mind gives disproportionate weight to the first information it receives.

  • Survivorship Bias. The frequent mistake to forget to include companies that no longer exist in research reports studying various forms of corporate performance.

Managers are well advised to constantly consider the probability that cognitive biases play an unexpected role in their management decisions.


In their book Decision Traps, Russo and Shoemaker reveal the ten most common mistakes in decision-making, many of which are related to cognitive bias:

  1. Plunging In: Beginning to gather information and reach conclusions too early.

  2. Frame Blindness: Creating a mental framework for your decision.

  3. Lack of Frame Control: Failing to define the problem in more than one way.

  4. Overconfidence in Your Judgment: Failing to gather key factual information.

  5. Shortsighted Shortcuts: Relying inappropriately on “rules of thumb”.

  6. Shooting from the Hip: Failing to follow a systematic procedure when making the final decision.

  7. Group Failure: Failing to manage the group decision-making process.

  8. Fooling Yourself About Feedback: Failing to interpret the evidence from past outcomes correctly.

  9. Not Keeping Track: Failing to keep systematic records to track the results of your decisions.

  10. Failure to Audit Your Decision Process: Failing to create an organized approach to understand your own decision-making.

A major consequence of cognitive biases for economics, financial practitioners and markets is the Efficient Market Hypothesis does not hold.


Cognitive Bias Forum
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  Outcome Bias in Decision Making
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OUTCOME BIAS
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  Perceptions Errors and Cognitive Bias are Similar
Perceptions Errors (misperceptions) are similar terms or concepts as cognitive bias when there are communication problems. Remember the Johari Window in managerial decision making, business, market...
     
 
  Cognitive Bias Literature
As a Private equity executive, I work with high growth small and medium enterprises (SMEs). I come across Cognitive Bias, or Cognitive Inertia, introduced due to the past successes of the promoters. In some ways, the past success becomes a Blinder....
     
 
  How to Fight Cognitive Bias?
How can Hindsight Bias, Rationalization and Confirmaton Bias be tackled?...
     
 

Cognitive Bias Special Interest Group


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Best Practices - Cognitive Bias Premium
  Your Customers, Employees, Managers and Stakeholders are all Irrational: Behavioral Economics
Most writers treat Cognitive Bias as a negative phenomenon that explains why humans (managers) are incapable of making rational decisions. In their view cognitive bias is frustrating rational decision-making.
Dan Ariely, Prof at Duke University,...
     
 

Expert Tips - Cognitive Bias Premium
 

How to Avoid Being Misguided by Experience-based Biases

We often make decisions based on past experiences and judge the future. However, our past experience can sometimes misguide us since we refine and rei...
Usage (application): Analogical Strategic Reasoning, Decision-making, Cognitive Bias, Bandwagon Effect, Confirmation Bias, Anchoring
 
 
 

How to Use Intuition in Decision Making Properly?

Matzler, Uzelac and Bauer (2014) have written a very interesting article on good Managerial decision making and the constraint...
Usage (application): Intuitive Decision Making, Adductive Reasoning, Bounded Rationality, Cognitive Biases, Managerial Decision-making
 
 
 

How to Use Counterintuition to Fight 5 Frequent Decision Making Errors

Mauboussin describes five mistakes in decision making that are often made and result in making the wrong decisions. These five mistakes are:
1...
Usage (application): Strategic Decision Making, Dealing with Complexity, Dealing with Uncertainty, Strategy
 
 
 

Do Sad or Happy People Make Better Decisions?

There is a common thought that being in a sad mood will result in a low degree of judgmental biases. For many judgmental biases this reasoning holds. ...
Usage (application): Decision Making, Negotiating
 
 

Resources - Cognitive Bias Premium

The Influence of Emotions and Moods on Decision-Making and Entrepreneurship

This presentation is about emotions in decision-making, thereby paying specific attention to Emotional Intelligence
1. Key questions
2. Emot...
Usage (application): Decision Making, Emotional Intelligence, Entrepreneurship, Cognitive Bias
 

Overview of Behavioral Economics and Bounded Rationality

This presentation is abut behavioral economics (an area that focuses on the bounds of rationality of economic agents). It is an extensive presentation...
Usage (application): Decision Making, Behavioral Economics, Trainings, Workshops
 

Full List of Cognitive Biases Classified into Four Different Areas

Presentation that classifies Cognitive Biases into four different areas, by S. Gupta (2011). It includes the following sections:
A. What are Cogn...
Usage (application): Decision Making, Human Behaviour, Management, Leadership, Strategy, etc.
 

Heuristics as Biases (defects) or Heuristics as Intelligence (beneficial)?

Presentation that mainly is about Heuristics as Biases and Heuristics as Intelligence, including the following sections:
0. Context
0.1 Rati...
Usage (application): Heuristics, Biases, Framing
 

Top 5 Strategy Pitfalls

Strategy is complex and companies are making many mistakes while working on it. Stuart Cross identified 5 frequent strategy pitfalls to avoid:
Usage (application): Strategy Errors, Strategy Traps, Strategy Barriers, Strategic Planning, Strategy Process
 

Avoiding Group Biases: The Pre-Mortem Technique

Nobel laureate Professor Emeritus Daniel Kahneman explains the Pre-mortum approach by Gary Klein to arrange a special meeting to make a group of peopl...
Usage (application): Group Decision Making, Avoiding Group Biases, Group Think, Tunnel Vision
 

Critical Thinking in Decision Making

Presentation about critical thinking for decision making, including the following sections:
1. Failure of Imagination
2. Untested Assumption...
Usage (application): Critical Thinking, Testing Assumptions, Avoiding Fallacies, Avoiding Biases, Dealing with Emotions
 

How to Improve Strategic Decision Making?

In this video Michael Mauboussin, Credit Suisse's Head of Financial Strategies, briefly explains parts of Philip E. Tetlock's Model of 3 areas that ar...
Usage (application): Strategic Decision Making, Cognitive Bias, M&A, Corporate Finance
 

Individual Decision Making and Group Decision Making

Presentation about Decision Making by groups and individuals. The presentation includes the following sections:
1. Knowledge Objectives
2. D...
Usage (application): Decision Making Process, Groupthink, Decision Making Styles, Vroom-Yetton Method
 

The Power of Persuasion: 3 Main Principles of Influencing Others

An extensive presentation about persuasion including many types and examples of persuasion experiements. The following sections are included:
1. ...
Usage (application): Persuasion Techniques, Managing Behavior, Cognitive Bias, Bounded Rationality, Resistance to Change
 
 

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Compare also: Management Metaphors  |  Metonymy  |  Analogical Strategic Reasoning  |  Behavioral Finance  |  Bounded Rationality  |  Paralysis by Analysis  |  Qualitative Investment Analysis  |  Causal Ambiguity  |  Feedback Loops  |  Groupthink  |  Myers-Briggs Type Indicator  |  Storytelling  |  Garbage Can Model

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