By Jack Babinchak, Ph.D., Central Penn College
Managers are asked to make decisions every day.
Some of these decisions are routine in nature and can be made without much effort; others are more complex and require more focused thought before a decision can be reached.
Regardless of the type of decision that needs to be made, the process of decision making is remarkably complex. Adding to this complexity are the number of shortcuts and cognitive biases we bring to the table. More than 100 cognitive biases have been documented in the literature that influence human decision making, judgment, and memory. For this article, I would like to focus on just two biases that have (arguably) the most significant impact on business decision making: 1) overconfidence bias and 2) confirmation bias.
The term “cognitive bias” comes from the field of psychology and is used to explain distortions in human reasoning that ultimately have a negative impact on judgment (McShane, Nirenburg, & Jarrell, 2012). Biases occur because humans are bound by certain constraints, including the inability to process large amounts of information because of limited cognitive capacity (Simon, 1957). In addition to this, businesspeople oftentimes face unrealistic time constraints for decision making. As a result, humans rely on a limited amount of information when making decisions, regardless of the ambiguity or complexity involved. This is where biases can rear their ugly heads.
The first bias is overconfidence. As human beings, we think that we are smarter, more skilled, more informed, and, in general, better, than others around us. If you don’t believe this, ask yourself who’s the better driver, you, your partner or your friends. Most of you will answer that you are a better driver. This is the overconfidence bias at work.
In a study done by Bazerman and Moore (2013), participants were asked to give a point estimate to certain facts and then develop a 98% confidence interval in which that estimate would fall. They were asked to estimate 10 quantities, like the world population in 2012 and Walmart’s gross revenue in 2010. Most participants provided a very tight interval around their point estimate, whereas the better strategy would be to provide a much larger interval to be sure that their point estimate was within their interval range. (Remember, participants were asked to be 98% sure their estimate was within their upper and lower interval). This happened repeatedly. This experiment demonstrates that we tend to be overly confident in our knowledge about facts that we are not sure about. Think of all the times you were confident in a fact, only to find out later that your information or recollection was incorrect. This also applies to our overconfidence in outcomes of future events.
The next bias is the confirmation bias. As human beings, we want to be right, and we don’t want to look bad, so we seek out information that aligns with our beliefs. Our beliefs are the innate truths that we hold about the world stored deep down in our subconscious. So, if we believe something to be true, we will usually go to sources of information that confirm the beliefs that we hold. As you can imagine, this leaves out a whole host of informational sources that may be counter to what we believe to be true. In doing so, we often dismiss or ignore credible information that would lead us to a different conclusion. This bias is particularly tricky since on the surface it appears we are conducting research and being diligent in seeking out information. In actuality, we aren’t seeking facts; we are seeking reassurance. This is evident in today’s political arena where conservatives tend to favor certain news outlets over others, while the same can be said for those with liberal ideologies.
Since overconfidence and confirmation often work hand in hand, there are four key strategies managers can employ to overcome these two biases.
1. Develop strategies that force you to think about alternative perspectives or interpretations to shake overconfidence and induce realism. In a very clear and detailed manner, think about why you may be wrong and consider likely alternatives. Appointing a devil’s advocate, or someone tasked with identifying alternative solutions or picking holes in the consensus alternative, will help to expedite this process.
2. Reflect on decisions and realistically appraise the outcomes. Ask yourself, “Was that the right decision, and what, if anything, could have been done differently?” Try to identify beliefs that you hold that could have influenced the decision that was made.
3. Move beyond your comfort zone when searching for evidence. Expand your proximity of influence and find other, credible sources of information that don’t exactly align with your worldview. Listen actively to counter arguments and perspectives; you may not always agree, but you may find yourself challenging certain beliefs you hold.
4. Accept your vulnerability to biases. Once you accept the fact that you are vulnerable to biases, you can foresee them and minimize their impact on the decision you make, allowing for more error-free decisions.
REFERENCES
Bazerman, M. & Moore, D. (2013). Judgment in managerial decision making (8th ed.). John Wiley and Sons.
McShane, M., Nirenburg, S., & Jarrell, B. (2013). Modeling decision-making biases. Biologically Inspired Cognitive Architectures, 3, 39-50.
Simon, H. (1957). A behavioral model of rational choice. Models of man, social and rational: Mathematical essays on rational human behavior in a social setting, 241-260.