Enhance your Decision-Making: Outsmart Cognitive Biases and Fallacies

When faced with a decision, whether professional or personal, it is essential to understand how cognitive biases contribute to creating the conditions for fallacious or perverse reasoning.

A cognitive bias is an automatic, unconscious and systematic error in reasoning inherent to the way we process information, based on our preconceived beliefs, misperceptions, the environment, emotions or memories. 

These are mental shortcuts that reflect our brain's attempt to streamline information processing to simplify the incredibly complex world we live in. Every second, we receive around 11 million bits of information. Yet we can only process 40 bits per second. 

Although cognitive biases come in many different forms, here are a few that I've observed throughout my life and career (and been guilty of myself). They include: the anchoring bias, the confirmation bias, the overconfidence bias, the status quo bias, the sunk cost bias, the framing bias. They may operate in isolation or, even more dangerously, they may work in concert, feeding off each other.
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The key to minimizing their influence on our decisions, and the best protection against our cognitive distortions, is to be aware of them. Forewarned is forearmed. While it's impossible to fully suppress all mental traps embedded in the way our minds work, there are ways of integrating checks and discipline in our thinking habits to help us detect errors of thought before they turn into errors of judgment.

What are the six most common cognitive biases?

The anchoring bias:

It occurs when we rely too heavily on either pre-existing information or the first piece of information (the anchor) when making a decision.

For example, the first number voiced during a price negotiation typically becomes the anchoring point from which all further negotiations are based. So, be particularly wary of anchors in negotiations. Think through your position before any negotiation begins in order to avoid being anchored by the other party’s initial proposal. At the same time, look for opportunities to use anchors to your own advantage – if you’re the seller, for example, suggest a high, but defensible, price as an opening gambit.

The confirmation bias:

Confirmation bias is the tendency to seek out information that supports our existing beliefs and opinions while ignoring information that contradicts them. 

There are two fundamental psychological forces at work here. The first is our tendency to subconsciously decide what we want to do before we know why we want to do it. The second is our inclination to be more engaged by things we like than by things we dislike.

For example, algorithms on the internet will contribute to confirm people's biases; as algorithms become familiar with people's preferences, they will display the information that is most likely to appeal to them, cementing their loyalty with every click.

The overconfidence bias:

Overconfidence bias leads us to believe that we are better at certain things than we really are. Most people think they're smarter, more honest or have a brighter future than the average person. For example, 93% of American drivers claim to be above average, which is statistically impossible.

For example, college students often overestimate their ability to complete assignments promptly and are forced to pull an all-nighter when they realize it's taking longer than expected.

The status quo bias:

In general decision makers display a strong bias toward alternatives that perpetuate the status quo. Sticking with the status quo represents, in most cases, the safer option, as it means less personal risk. 

For example, in business, where doing something (the sin of commission) tends to be punished much more severely than doing nothing (the sin of omission), there is a clear benefit to the status quo. A good number of mergers fail simply because the acquiring company fails to take swift action to impose a new, more appropriate management structure on the acquired company. “Let’s not rock the boat right now,” the typical reasoning goes. “Let’s wait until the situation stabilizes.” But over time, the existing structure becomes more entrenched, and changing it becomes increasingly difficult. By failing to seize the opportunity for change, when change would have been expected, management finds itself stuck in the status quo.

So, first, avoid exaggerating the effort or cost involved in abandoning the status quo, second, remember that the desirability of the status quo will change over time. When comparing alternatives, always evaluate them in terms of the future as well as the present.

The sunk cost bias:

Another of our deep-seated biases is to make choices in a way that justifies previous choices, even if they no longer seem valid. Most of us fall into this trap. It's the tendency to keep investing in something – a business, a relationship, a technology, etc. – because we've already spent a lot of time or money on it. We simply don't want to start over, and there is a feeling it will get better.

The problem is that we keep pouring resources down a rat hole. Even when it may be time to cut our losses, we feel we can't “waste” the resources we've already invested in this project that’s no longer viable.

Sometimes, corporate culture reinforces the sunk-cost trap. If the penalties for making a decision that leads to an unfavorable outcome are overly severe, managers will be encouraged to let failing projects drag on endlessly, in the vain hope of one day turning them into successes. In an uncertain world where unpredictable events are frequent, good ideas can sometimes lead to bad outcomes. So, it’s important to avoid cultivating a failure-fearing culture that leads employees to perpetuate their mistakes. When rewarding employees, it's important to consider the quality of their decision-making (taking into account what was known at the time the decisions were made), not just the outcome.

The framing bias:

The first step in making a decision is to frame the question. It’s also one of the most dangerous steps. The way a problem is framed can profoundly influence the choices you make.

In a case involving automobile insurance, for example, the framing resulted in a $200 million gain versus loss. In an effort to reduce insurance costs, two neighboring states, New Jersey and Pennsylvania, made similar changes to their legislation. Both states offered drivers a new option: lower insurance premiums by limiting their right to sue. But the two states formulated the choice very differently: in New Jersey, you automatically got the limited right to sue, unless you specified otherwise; in Pennsylvania, you retained the full right to sue, unless you specified otherwise. These different frames created different situations and, not surprisingly, most consumers defaulted to the status quo. As a result, in New Jersey, about 80% of drivers opted for the limited right to sue, while in Pennsylvania, only 25% did. Because of the way it framed the choice, Pennsylvania failed to gain around $200 million in expected insurance and litigation savings.

How to make better decisions?

We must be aware of our own biases and try to prevent them from influencing our decisions and interactions with others, so that we can make objective decisions that are based on evidence rather than preconceived ideas. Here are some basic principles for improvement.

• Be aware of the different biases. Think about which ones you gravitate toward and what they may be causing you to do. Once you are aware of them, you can start to take steps to mitigate their effects. 

• Ask for feedback from others. Seeking the advice of others to consider alternative viewpoints and challenge your own may reduce the impact of biases in your thinking and provide a more fact-based representation of the bigger picture. Remember that other people might spot your cognitive biases.

• Be transparent about your decisions and why you made them. This will help to ensure that everyone understands the rationale, data and intent behind them and how they align with the overall mission and vision of the company. 

• Make decisions based on facts. By making decisions based on the evidence, leaders can avoid costly mistakes.

• Delay your decisions to protect yourself from relying on your cognitive biases and to avoid making decisions under time pressure. It may sound surprising, but in very few cases do you have to decide on the spot. Take a break and think things through. Use this time to engage in critical thinking exercises, such as contemplating the exact opposite to your first opinion or imagining what advice you might give to a friend in a similar situation. This reflection period allows for a more measured approach, increasing the likelihood of making the right decision.

• Implement strategies. Finally, implement strategies to minimize the impact of biases and fallacies on your decision-making. This could involve creating checklists that prompt you to consider various aspects of a decision or using techniques like the 'five whys' to drill down to the root cause of a problem. Structured decision-making frameworks can also guide you through a more objective analysis, reducing the sway of cognitive distortions.

Final thoughts

High-stake, highly complex decisions are the most vulnerable to cognitive biases that distort our perspective and judgment, as they often involve a large number of assumptions and estimates, as well as inputs from many different people. 

As we noted at the outset, these biases can operate in isolation or, even more dangerously, in concert, feeding off each other. For example, a strong first impression can anchor our thinking, after which we might selectively seek out information to confirm our initial inclination. Next, we may rush to make a decision that will set a new status quo. With sunk costs mounting, we find ourselves trapped, unable to find the right moment to look for another, perhaps better, way forward. The cascade of mistakes makes it increasingly difficult to make the right choices.

So, the key is to identify our cognitive distortions upstream and mitigate their effects by training our minds to adopt new thinking patterns.