Cognitive Bias

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Definition Cognitive Bias?

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 invested resources, such as time, money, or effort, 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. For example, 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.

Forum Forum about the Cognitive Bias. 🔥 Hindsight Bias Let us assume that you had an interview for the post of a Research Analyst at a top firm. After a few days, you get an email from them saying that you have been recruited for that post. Excited and ha... 18   10 comments Overview of 180+ Cognitive Biases Check out this amazing visual of 180+ cognitive biases called: "The Cognitive Bias Codex": Wow.... 10   Survivorship Bias We all have often seen articles like: "12 things successful people do differently'" or "20 tips from the world's most successful people". Logically speaking, if it helped them to attain success, it sh... 9   5 comments How to Avoid Biases in Recruitment and Talent Management As discussed in my post of Workplace Diversity: what Works and what Doesn't, most corporate diversity trainings have failed. That is because our minds are 'stubborn beasts' and we don't like to be for... 7   How to Fight Cognitive Bias? How can Hindsight Bias, Rationalization and Confirmaton Bias be tackled?... 7   1 comments 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. ... 4   What are Heuristics? Heuristics basically are rules that when followed result in a solution. Suppose there were no roads and you wanted to make your way, a heuristic might be: 1. Walk as far as you can. 2. Walk aroun... 3   How to Overcome Judgement Noise As human beings, our judgements can be strongly influenced by irrelevant factors. Even professionals with rich experience on the job treat identical cases quite differently at different time points, a... 3   Outcome Bias in Decision Making The fact that something worked doesn't mean it was the result of a correct decision, and the fact that something failed doesn't mean the decision was wrong (Howard Marks, Inspiration from the World of... 3   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, marketing... 3   Start a new topic about the Cognitive Bias Sign up for free

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Best Practices The best, top-rated topics about the Cognitive Bias. Here you will find the most valuable ideas and practical suggestions. 🥇 Stories About Human Biases 😃 Once upon a time a grain merchant loaded wheat on his camel's back. He managed to load 50 kilograms of wheat on one side. In order to balance the burden, he loaded another 50 kgs bag of sand on the ot... 15   12 comments 🥈 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... 11   7 comments

Expert Tips Advanced insights about the Cognitive Bias. Here you will find professional advices by experts. Consultancy Tips Teaching Tips Practical Implementation Tips Dangers of Categorical Thinking Decision-making, Strategy, Strategic Thinking Categorization, taking in voluminous amounts of messy data and then simplifying and structuring it so that you can make ... How to Avoid Being Misguided by Experience-based Biases Analogical Strategic Reasoning, Decision-making, Cognitive Bias, Bandwagon Effect, Confirmation Bias, Anchoring We often make decisions based on past experiences and judge the future. However, our past experience can sometimes misgu... How to Use Intuition in Decision Making Properly? Intuitive Decision Making, Adductive Reasoning, Bounded Rationality, Cognitive Biases, Managerial Decision-making Matzler, Uzelac and Bauer (2014) have written a very interesting article on good Managerial decision making and the cons... How to Use Counterintuition to Fight 5 Frequent Decision Making Errors Strategic Decision Making, Dealing with Complexity, Dealing with Uncertainty, Strategy Mauboussin describes five mistakes in decision making that are often made and result in making the wrong decisions. Thes... Do Sad or Happy People Make Better Decisions? Decision Making, Negotiating There is a common thought that being in a sad mood will result in a low degree of judgmental biases. For many judgmental...

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