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The Psychology of Bad Decisions
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Overcome Mental Gremlins and Make the Right Choice
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Imagine you're researching a potential product. You think that the market is growing, and you find information that supports that view.
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As a result, you decide that the product will do well, and you launch it.
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But the product fails. The market hasn't expanded, so there are fewer customers than you expected. You can't sell enough of your products to cover their costs, and you make a loss – and suddenly your job is on the line.
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Which is the right way? Psychological bias can lead you to make a wrong decision.
© iStockphoto/VicZA In this scenario, your decision was affected by confirmation bias. You interpreted market information in a way that confirmed your preconceptions instead of seeing it objectively, and you made a wrong decision as a result.
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What is Psychological Bias?
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Confirmation bias is just one of many psychological biases to which we're susceptible when we make decisions.
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Psychologists Daniel Kahneman, Paul Slovic, and Amos Tversky introduced the concept of psychological bias – also known as cognitive bias – in the early 1970s. They explained that psychological biases are mental gremlins: spanners in the works of logical thought processes. They cause you to make poor decisions because your information isn't objective.
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Below, we outline five psychological biases that are common in business decision making, and explore how to overcome them.
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1. Confirmation Bias
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As we explained above, confirmation bias happens when you look for information that supports your existing beliefs and reject data that go against what you believe. As a result, you make a flawed decision because you don't factor in all of the relevant information.
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Confirmation bias is a potentially serious problem in statistics-based decisions. Researchers in a 2013 study found it can affect the way people view statistics, and, in particular, that we tend to infer information from statistics that supports their existing beliefs, even when the data suggest an opposing view.
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How to Avoid Confirmation Bias
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Look for ways to challenge what you think you see. Seek out information from a range of sources, and use an approach such as the six thinking hats technique to consider situations from multiple perspectives.
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Alternatively, discuss your thoughts with others. Surround yourself with a diverse group of people, and don't be afraid to listen to dissenting views. Can you assign someone on your team to play devil's advocate?
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2. Anchoring
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This is the tendency to jump to conclusions – that is, to base your final judgment on information gained early on in the decision-making process.
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How to Avoid Anchoring
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Anchoring often happens when you feel under pressure to make a quick decision, or if you have a general tendency to act hastily. To avoid it, reflect on your decision-making history, and think about whether you've rushed to judgment in the past. Then make time to make decisions slowly, and be ready to ask for longer if you feel under pressure to decide quickly. Remember: if someone is pressing for a decision, this is a sign that what they're pushing for is against your best interests.
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Read our article on the ladder of inference to find out more about the stages of thinking people tend to go through when they make good decisions.
3. Overconfidence Bias This happens when you place too much faith in your own opinions. You may also believe that your contribution to a decision is more valuable than it actually is. Overconfidence is often accompanied by anchoring. If you tend to act on hunches, then your decisions could well be being influenced by these two biases. In a 2000 study, researchers found that entrepreneurs are more likely to display the overconfidence bias than the general population. They often fail to spot the limits to their knowledge, so they perceive less risk.
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How to Avoid Overconfidence Bias Think about these questions as you make your decision:
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Have you tended to rely on facts when you've made previous decisions? If you've based decisions on hunches, make sure you involve other people in the decision to temper this tendency? Has information you need for your decision been gathered systematically? If not, ask a colleague to check your data and spot gaps.
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4. Gambler's Fallacy With gambler's fallacy, you expect past events to influence the future. A classic example is a coin toss. If you toss a coin and get heads seven times consecutively, you might assume there's a higher chance that you'll toss tails the eighth time. Your belief will probably strengthen the more times you toss the coin. However, in this example, the odds are always 50/50. Gambler's fallacy can be dangerous in a business environment. For instance, imagine you're an investment analyst in a highly volatile market. Your four previous investments did well, and you plan to make a much larger one because you see a pattern of success. In fact, your previous successes have only a small bearing on the future. How to Avoid Gambler's Fallacy A 2008 study reported that gambler's fallacy was less likely to happen when decision makers avoided looking at information chronologically. So, make sure that you look at trends from a number of angles. Drill deep into data using tools such as situational appreciation. If you notice patterns in behavior or product success – for example, if several projects fail unexpectedly – look for trends in your environment, such as changed customer preferences or wider economic circumstances. Tools such as PEST analysis can help here.
5. Fundamental Attribution Error This is the tendency to blame others when things go wrong, instead of looking objectively at the situation.
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For example, if you're in a car accident, and the other driver is at fault, you're more likely to assume that he or she is a bad driver than you are to consider whether bad weather played a role.
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Fundamental attribution error is the opposite of actor-observed bias. It means you tend to place blame on external events. For example, if you have a car accident that's your fault, you're more likely to blame the brakes or the wet road than your reaction time.
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Try to look at situations, and the people involved in them, non-judgmentally. Use empathy and (if appropriate) cultural intelligence to understand why people behave in the ways they do. Also build emotional intelligence so you can reflect accurately on your own behavior.
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References
It's hard to spot psychological bias in ourselves, because it comes from subconscious thinking.
Barron, G.M. and Leider, S. (2008) 'Making the Gambler's Fallacy Disappear: The Role of Experience,' Harvard Business School Working Paper. (Available here.) [Accessed 16 September 2013.]
For this reason, it's sensible to make major decisions with other people's input. Research backs this up. Social scientists Daniel Kahneman, Dan Lovallo, and Olivier Sibony reflected on this in a 2011 Harvard Business Review article, and showed how group decisions were often more effective in the long run because members of the group spotted and balanced out psychological biases.
Kahan, D., Peters, E., Dawson, E.C., and Slovic, P. (2013) 'Motivated Numeracy and Enlightened Self-Government,' Social Science Research Network, 3 September, 2013. (Available here.) [Accessed 23 July 2013].
Key Points Psychological bias is the tendency to make decisions in an unknowingly irrational way. If you're making a major decision, look for ways to challenge this irrationality. Use tools that help you assess background information systematically, surround yourself with people who will question your opinions, and listen carefully to their views – even when they tell you something you don't want to hear.
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Kahneman, D., Lovallo, D., and Sibony. O. (2011) 'The Big Idea: Before You Make That Big Decision...,' Harvard Business Review, 2011. (Available Click to voteJune yes Click to vote no here.) [Accessed 12 September 2013.]
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Where to go from here:
Kahneman, D., Slovic, P., and Tversky, A. (1982) 'Judgment Under Uncertainty,' Cambridge: Cambridge University Press.
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View printSimon, friendly M.,version Houghton, S., and Aquino, K. (2000) 'Cognitive Biases, Risk Perception, and Venture Formation: How Individuals Start Companies,' Journal of Business Venturing, Volume 15, Issue 2, March 2000. (Available here.) [Accessed 23 July 2013].
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