There are many cognitive biases that can lead us to make poor decisions in life and in business. I previously wrote about how Survivorship Bias fools us into thinking there is a "success formula". In this article, I focus on a selection of other thinking biases and provide suggestions for how to inoculate ourselves from them.
The information you receive at the beginning can heavily bias your subsequent thinking. The initial data “anchors” your perceptions:
A salesperson offers an item at a high price. This "anchors" the value at that price point. Then when they offer you a “special discount” you can be tricked into thinking you are getting a good deal.
Amazon.com shows each product with a list price, alongside Amazon's discounted price and a calculation to show how much you will save. However, there are browser extensions that graph the Amazon price history of the item over the last 12 months, as well as the retail price from other competing online stores (Walmart, Target, Jet etc). You will probably find that Amazon's list price is just an "anchor" to trick you into thinking you are getting a better deal than you actually are.
Seek information from a wide variety of sources and hold off from making any conclusions early in your decision-making process. Research the options on your own before asking others for their opinions. Avoid being anchored by other people's opinions no matter how persuasive the source appears to be (politicians, media, social influencers).
Status Quo Bias
We give the status quo preference over other alternatives because it's what we are accustomed to. We stay on our current course or repeat the same patterns of behavior unless we are strongly compelled to make a change:
A sales team might put up with sub-standard CRM technology, or follow an inefficient sales process, or even worse, not adhere to a consistent sales process at all. The sales reps have figured out their own unique ways to operate and the status quo feels "normal" to them and they don't want to change.
Practice zero-based thinking. What do you ultimately want to achieve? The status quo is just one of many alternative paths to achieve your goal. If you could start again with a blank sheet of paper, would you still choose the current course of action? Avoid exaggerating switching costs. It may be worth suffering short-term cost and inconvenience in order to achieve greater long-term gains.
Sunk Cost Bias
Similar to the Status Quo Bias. If you made a bad decision in the past, admit it and learn from it. The money has already been spent. It’s a sunk cost, and it shouldn’t influence your future decisions. Don't throw good money after bad hoping that things will turn around. This is a trap compulsive gamblers fall victim to. It's also the case with business improvement initiatives that never seem to deliver the results that were expected. Should we keep trying or cut our losses.
The solution once again is to practice zero-based thinking. If you were starting afresh, would you still choose your current course of action? What is the right decision to make now?
Sunk Cost Bias is one reason why hiring an outside CEO can help to revitalize a company that has become bloated with too many products, services, and features. The outsider has no ego attachments to past decisions. They pull the plug on unsuccessful initiatives and can be more rational when it comes to future resource allocation.
We look for evidence to support our biases (our current opinions) while avoiding or discounting information that challenges our point of view. No matter how neutral or rational we think we are, our brains tend to tune out things that don’t conform to our initial idea of what we think is right:
Once a person has identified with a political party and the bundle of issues or "positions" taken by leaders of that party, they tend to follow only the news sources that confirm their beliefs and tune out or avoid any counter-arguments.
Deliberately expose yourself to conflicting information. Surround yourself with people who will challenge your point of view and offer contrary opinions. Force yourself to keep an open mind. Ask yourself, "What are my assumptions about this issue?" and "What if my assumptions were wrong?"
In company meetings, to avoid the trap of "group-think" where everyone is thinking alike, or where employees are too scared to speak up for fear of offending the boss, nominate someone to play devil’s advocate, where their role is to deliberately put forward opposing viewpoints and point out the negatives.
First Impressions Bias
Our prejudices and preconceived notions can make us jump to conclusions before checking whether we have enough information to justify such a decision. First impressions are mental shortcuts that happen at a subconscious level in our brains. These intuitive "gut impressions" were useful rules of thumb when we lived in small nomadic tribes during the Paleolithic Era, but over-relying on them in the modern world often leads to thinking errors:
We tend to view favorably people who look like us, think like us, and share similar backgrounds. This can lead to people of a different race, gender, and background being unfairly pre-judged.
Acknowledge your initial "reptile-brain" reactions, but slow down and engage your higher cognitive functions before making a decision or judging someone. Question your knee jerk reactions and initial assumptions. Are they really true? Be curious. Ask more questions. Get to know people first. Deal in facts.
“Social proof” is also part of our genetic survival mechanism. When the herd runs, it made sense to immediately run in the same direction, without waiting to see if there really was a lion chasing us. Our survival instincts have bred into us that the “popular choice” is generally the best option.
And of course, there is always peer pressure to follow the crowd. So what if the crowd is wrong? When everyone is making the same mistake it does not feel as bad (we’re all in the same boat) compared to failing alone.
However, the herd bias can lead people to make investments and decisions they don't fully understand because "everyone else is doing it".
When analyzing information, try to shield yourself from popular opinion, at least at first. Beware of “buying” products, swallowing political ideas, or making financial investments based on their current popularity, and ask yourself, "What are the facts?" Research the options, and make the most rational choice you can. Have the courage to defend your point of view even if it seems unpopular or unfashionable at this point in time.
Illusion of Control Bias
People assume they can control outcomes (if I do “X”, then I will get “Y”), and greatly underestimate the role of luck and random events. As I wrote in a previous article on Survivorship Bias, no matter how much you want something, how hard you work, or how diligently you follow the “success formula”, success is never guaranteed. Our genetics, country of birth, gender, skin color, parenting, poverty level, neighborhoods, schools, social contacts, luck, and timing play a far bigger role in outcomes than the gurus would have us believe.
Take responsibility for the things you can influence. Learn and master the core skills. Work hard. Put yourself in situations that increase the odds of serendipitous encounters. But remember this maxim from Nassim Taleb, “Mild success can be explainable by skills and labor. Wild success is attributable to variance”.
According to Taleb, we should design our lives to be "antifragile", where we manage the downside risk of negative outcomes, whilst still allowing ourselves to benefit from positive outcomes. Basically, we maximize our chances of success by knowing what to avoid:
Chess grandmasters win by not losing. Savvy investors become rich by not going bust (particularly when others do). Warren Buffett said, "Rule #1: Never lose money. Rule #2: Never forget rule #1."
Don't walk alone down dark alleys at night. Take out insurance policies against unforeseen circumstances ("black swan" events). Quantify the downside risks and costs of the worst case scenario and make a contingency plan to deal with this scenario before making an important business decision.
Or, as the Roman poet Ennius wrote, “The good is mostly in the absence of bad”.