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