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May 9

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How spotting cognitive bias can improve your bottom line

By Jennifer Clinehens

May 9, 2019


Everyone's thinking is subject to bias. These biases, also called heuristics, or mental shortcuts, are the hidden forces that shape your choices. And these forces aren’t random. In fact, they are common, predictable, and easy to spot if you know what you’re looking for.

In his book Predictably Irrational: The Hidden Forces That Shape Our Decisions, Dan Ariely puts it this way:

“Standard economics assumes that we are rational… But, as the results presented in this book (and others) show, we are far less rational in our decision making. Our irrational behaviors are neither random nor senseless- they are systematic and predictable. We all make the same types of mistakes over and over, because of the basic wiring of our brains.” 
― Dan Ariely

You may believe that your decisions are bulletproof. Unfortunately, everyone, from the CEO down to the office intern, is subject to errors in thinking. They’re called cognitive biases, and they shape the way we take in, process, and use information. The context of the information we get and the filters we use to consider it are as important as the information itself.

The context of the information we get and the filters we use to consider it are as important as the information itself. @choicehacking

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Combating cognitive bias can improve your ROI

In a recent study, McKinsey showed that when companies worked to reduce the effects of cognitive bias, they raised ROI by at least 7%. However, these cognitive biases are hard to spot if you don’t know what you’re looking for. Take the time to ask yourself each of these 10 questions to discover if you’re falling victim to a common cognitive bias. There’s no downside, but the upside on spotting faulty thinking can be huge.

“It is easier to recognize other people’s mistakes than our own.”
― Daniel Kahneman, Thinking, Fast and Slow

Here’s a five minute checklist for detecting cognitive bias

  1. Check for Self-serving BiasThis is the tendency for people to protect their ego and vested interests. It might take the form of cherry-picking data to support your current opinion. You might be dismissing the views of dissenters because you don’t want to bruise your ego. Interrogate the data and assumptions that led to this decision and ask yourself, “Was anything dismissed because it didn’t agree with my vested interest (or my boss’)?”
  2. Check for the Affect HeuristicThis is the tendency for people to make a decision based on their emotional state. For instance, if you emotionally associate “innovation” with something positive, you’re more likely to judge a new project as being lower risk than it actually is. Interrogate your own feelings and associations with this project. Ask yourself honestly, “Have I fallen in love with this idea?”
  3. Check for GroupthinkThis is the tendency for decision-making groups to favor conformity with the team over making the more rational decision. They don’t want to risk being an outcast, so they go along with the herd mentality, resulting in an irrational outcome. Think through the project and ask yourself, “Did me, or anyone else on the team, disagree with the majority opinion? Was their voice heard, or was it shouted down in favor of the group?”
  4. Check for the Halo Effect: This is the tendency to assume lots of ambiguous facts based on one particular point. For instance, if you find someone attractive, you’re more likely to think they’re honest, competent, and intelligent. Look at the case studies and facts that led you to this decision. Ask yourself, “Am I assuming that because a similar approach worked for someone else (who’s successful), that it’ll work for me?”
  5. Check for the Sunk-Cost Fallacy: This is the tendency for people to let past time and money costs influence the future of a project. However, future costs of a project are the only rational point of data for investors. This is the bias that leads people to throw “good money after bad.” Ask yourself, “If I was the new CEO on my first day, would I still make the same decision? Or am I being over-influenced by the history of this project?”
  6. Check for Overconfidence BiasThis is the tendency for people to think of their own abilities as better than they are because they’re successful now. They tend to make every decision with the attitude that they “can’t lose,” because of their current success. Ask yourself, “How skeptical am I? Did I challenge all my assumptions? Am I being overconfident because of my current success?”
  7. Check for Loss Aversion: This is the tendency for people to want to avoid a loss more than they want to risk an equivalent gain. Often, you’ll see this bias in people who don’t want to sell a house for less than they paid for it. They’d rather lose money holding out for a higher purchase price than risk getting back less than they paid. Ask yourself, “How open to risk am I? Am I picking the safest option because it’s the right option, or the least risky?”

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