At a Glance
- Cognitive bias, a systematic error in thinking that affects people’s decisions and judgements, can have an impact on business transformation.
- Biases arise from an individual’s beliefs and experiences and lead to poor judgement, flawed reasoning, and ineffective problem solving.
- Some of the most common cognitive biases, such as the sunk cost fallacy, in group bias, confirmation bias, and the backfire effect should be avoided when making decisions and judgements.
Our view of the world is refracted through the lens of our experiences and beliefs. Although we cling to these internal narratives and believe we are all striving for that elusive objectivity, our brains are riddled with biases and blind spots. As a result, these biases predispose us to misinterpretations and impair our ability to make rational judgements.
If our internal compasses are prone to mistakes due to bias, how can we truly ensure that the decisions we make every day, especially business decisions that can cost millions or billions, are objective?
This article explores the maze of human cognition, unravelling the cognitive pitfalls that distort our judgement and discussing the tools that can help you understand and navigate towards a more objective, balanced truth.
What is cognitive bias?
Cognitive bias is a systematic error in thinking that affects the decisions and judgements people make. Typically, these biases are based on your beliefs and experiences and lead to poor judgement, flawed reasoning, and ineffective problem solving.
While some biases are well known — the placebo effect, hindsight and procrastination — many remain hidden but actively shape your understanding of human nature. Understanding these biases is critical in business because they have a significant impact on the success of business transformation. In the context of business process management, cognitive biases can distort rational judgement, leading to sub-optimal processes and missed opportunities. Some common biases, such as overconfidence and overoptimism, can reduce organisational performance.
Research shows that when people say they are 100% sure they are right about something, they are typically right about 70%-85% of the time. When they say they are 65%-70% sure, they are only right 50% of the time. Therefore, leaders with an overconfidence bias are more likely to make poor decisions that hinder transformation management.
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Cognitive biases that can affect business decisions
Operating with cognitive accuracy and understanding the mistakes we make and why is important because it can improve organisational performance and employee satisfaction. Here are some of the most common cognitive biases to avoid in your decision-making and judgement:
1. Sunk Cost Fallacy
When you irrationally hold on to things that have already cost you something, this, is essentially the sunk cost fallacy – a cognitive bias that forces us to prioritise past investments over future benefits, even when the evidence screams otherwise.
This fallacy thrives on our aversion to loss. The emotional sting of giving up something we’ve invested in, be it money, time, or effort, can overshadow the potential gains of cutting our losses. This emotional attachment clouds our judgement and leads to organisational inertia, where your business gets stuck in unproductive ventures due to an excessive focus on past investments.
2. Confirmation Bias
The tendency to gather and interpret information that is consistent with our pre-existing beliefs is confirmation bias. This type of cognitive bias causes you to overlook or ignore any evidence that supports an opposing view.
Our cognitive processes are predisposed to favour ideas that confirm our existing perceptions, creating a tendency to validate and support our current views. For example, a manager may strongly believe that a particular marketing strategy is key to the success of the business. Despite data showing a decline in customer engagement and sales, the leader focuses only on the positive feedback from a few customers who praise the strategy. Ultimately, this can lead to missed opportunities as the leader’s confirmation bias prevents them from considering alternative marketing approaches that may be more effective.
3. Backfire Effect
The backfire effect is a cognitive bias that causes you to see any evidence that challenges your beliefs as an attack on your sense of self or identity. This can lead to motivated reasoning, which causes us to double down despite disconfirming evidence. Being open-minded, especially when you are on the defensive, is an essential leadership trait.
4. In Group Bias
You tend to favour members of your own group while excluding other groups. This is known as in-group bias. In most situations we assume we are being fair and impartial, but the truth is that we automatically favour those who are most like us or belong to our groups. In-group bias can stifle creativity and innovation in an organisation.
With more than 180 cognitive biases influencing the way we process information and think, it is clear that these biases can significantly influence subjective thinking in humans. Understanding and acknowledging these biases within ourselves is important as it allows us to gain insight into the complexity of our thought processes. With this information, people, especially those in leadership positions, can strive for a more objective and mindful approach to decision making.
Mitigating cognitive bias
There are steps that can be taken to effectively mitigate cognitive bias. It is important to cultivate an open mind and remain vigilant against defensiveness. Practice active listening to understand different points of view. Use problem solving and decision-making tools such as the five whys and logic trees to improve the objectivity of your analyses.
Actively seek external perspectives and recognise the importance of diverse opinions, especially when surrounded by unanimous agreement. When faced with challenges, consider taking a break or revisiting the issue later to refresh your thinking. It can be beneficial to reflect on past decisions to identify and address recurring cognitive biases, thereby promoting continuous improvement in decision-making processes.
Avoiding the pitfalls of cognitive bias in business transformation
Driven by the dynamic nature of the business environment and the pursuit of growth, companies often seek to transform. Operational efficiency, technological advances, market volatility – the motivations for business transformation are many. As these transformations take place, blind spots often lurk.
Internal confidence, while important, can turn into an optimism bias, leading teams to potential roadblocks. Overly optimistic internal teams may set unrealistic goals and timelines, leading to loss of momentum and budget overruns. These entrenched perspectives, fuelled by cognitive biases, paint a distorted picture of success.
This is where third-party consultants like Renoir come in. Our experienced consultants, untainted by internal bias, provide a clear, neutral perspective based on data-driven analysis and industry benchmarks. We also challenge assumptions and navigate around cognitive pitfalls, shattering pre-existing beliefs through critical evaluation.
During the transformation process, internal teams may face resistance from employees due to fear and uncertainty. Renoir’s team of change management experts, with over 25 years of experience can help cultivate buy-in for implementation through behavioural and cultural change methodologies.
Ready for change? Don’t let your biases get in the way.
