Cognitive Bias

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Description of Cognitive Bias. Explanation.

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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).

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 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.
Status Quo Bias. The tendency for people to like things to stay relatively the same.
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:

Plunging In: Beginning to gather information and reach conclusions too early.
Frame Blindness: Creating a mental framework for your decision.
Lack of Frame Control: Failing to define the problem in more than one way.
Overconfidence in Your Judgment: Failing to gather key factual information.
Shortsighted Shortcuts: Relying inappropriately on “rules of thumb”.
Shooting from the Hip: Failing to follow a systematic procedure when making the final decision.
Group Failure: Failing to manage the group decision-making process.
Fooling Yourself About Feedback: Failing to interpret the evidence from past outcomes correctly.
Not Keeping Track: Failing to keep systematic records to track the results of your decisions.
Failure to Audit Your Decision Process: Failing to create an organized approach to understand your own decision-making.

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Recent User Comments

    			 
  			   Vivek Joshi - India
  	       
  		     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.  Getting past this Inertia or Bias becomes key to success.  The inertia may be due to the Systems & processes,  Thought process of key managers,  or even Ego.  It would be useful to know litterature on this."
  			   
    	  		 0

    			 
  			   Anshuman Bhattacharjee - India
  	       
  		     How to Fight Cognitive Bias?
  	  		 "How can Hindsight Bias, Rationalization and Confirmaton Bias  be tackled?"
  			   
    	  		 0

    			 
             Editor - Netherlands
  	       
  		     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, author of 'Predictably Irrational: The Hidden Forces That Shape Our Decisions', in last HBR is introducing another view and proposes to replace rational economics (based on the assumption that humans fundamentally make rational decisions and that the market's invisible hand serves as a trustworthy corrective to imbalance) by behavioral economics (based on the assumption that humans fundamentally make irrational decisions and are motivated by the invisible hand of unconscious cognitive biases).

In behavioral economics, customers, employees, managers and stakeholders are assumed emotional, myopic and easily confused and distracted. Experimenting with things such as bonus schedules, product pricing, consumer choices and employee behavior are crucial to predict behavior. Ariely warns that the BE process is time-consuming, delicate and may not always provide clear results apart from showing that our initial assumptions were wrong."
  			   
    	  		 6

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End of description Cognitive Bias. An explanation.

Copyright 2010 12manage - The Executive Fast Track. V10.4 - Last updated: 2/9/2010. All names tm by their owners.

	└► Colin Downey (New Zealand)	Human Emotions	"Behaviours stem from the physical state of wanting to avoid pain and gain pleasure. Many decisions become irrational as you are dealing with human emotions and the desires of the person making the decision. In their mind the decision may be rational in others it may seem irrational based on who's desires are being fulfilled."
	└► Gonca Telli Yamamoto (Turkey)	Economically People are Rational in General	"It is important to take care of cognitions for managers of companies or other institutions. As economically people are rational in general, or when looking at a price. However when it comes to the personal life and negotiations it is mostly irrational because of the personalities which also a little bit explains the behavioral economics."
	└► Judy Nelson (USA)	Behavioral Economics	"I've been thinking a lot about the BE article since I first read it. The continuing revelations of brain research may make the conversation moot eventually. Until we fully -- or at least much better -- understand our brain chemistry, I think there is the ever-present danger of absolutes. As the authors of "Crucial Conversations" point out, this is an example of "Sucker's Choice" -- it's either one or the other. It may be wiser to try to avoid Sucker's Choice and look at this as either/and. In other words, human beings are not so easily categorized. Fortunately, they are also able to modify behaviors with the right motivation, training and feedback. Otherwise, the term "management" can easily be replaced by manipulation and my experience of 30 years as a CEO tells me that most employees are capable of choosing behaviors."
	└► Gill (UK)	Not Economically Rational	"If you read Dan's book and his experiments, you will see that customers are not rational even economically, that is, pertaining to price. Presumably this is because we use heuristics which worked once but are no longer so successful. Much of this is because we assess things in a relational way rather than in absolute terms - which is presumably how we manage complexity."
	└► Ronald Gross (United States)	Cognitive Behavior in Money Management	"I believe most members will find "The Seven Deadly Sins of Money Managers" written by James Montier to be invaluable. Although there are differences between money management and corporate management-the similarities are startling."
	└► Richard Cushing (USA)	Going for the Gain	"Dan Ariely should read Ludwig Von Mises' HUMAN ACTION, if he has not done so already. Human beings will ALWAYS take the action that they deem to be "gain" for them in EVERY circumstance. Even the individual that sacrifices his own life to save another does so because doing so -- in some way or other -- is GAIN to him or her. However, it is NOT POSSIBLE, in every decision, to know the ACTUAL OUTCOME of the decision. The fact that an individual BELIEVES ex ante that a certain action will bring GAIN does not mean that taking that certain action will IN FACT bring GAIN ex post. As a result of this UNCERTAINTY and because the outside OBSERVER cannot know absolutely what is measured as GAIN by any other individual, certain actions may SEEM TO BE IRRATIONAL. However, the fact that an action seems to be IRRATIONAL to me (as an observer) does NOT make the action IRRATIONAL IN FACT to the actor."
	└► Zen (USA)	Cognitive Capacity	"There is a new trending of awareness in this arena. I've witnessed how 'present' conversations transcend past or future concerns to bring a powerful activity into the cognitive realms. Possibility coagulation occurs as unreasonable or irrational linear thinking disappears. Non linear cognitive awareness overwhelms the senses initially, but the result is a new living awareness of 'now' that opens the mind/heart to listening at levels previously never known possible. It is a practice that think tanks and decision makers engage to transform. The practice cannot be learned through reading or any 'thinking' process to date. It is experiential and engaged in the moment by a skilled facilitator, adept in the art and science of being."