A cognitive bias is a type of error in thinking that occurs when people are interpreting and processing the information around. Depending on different sources there are anywhere between 53 and 104 distinct cognitive biases. As an entrepreneur, the most important thing you do is make decisions. As such being aware of cognitive biases and considering them when you are presented with information for decision making is important. I’ve whittled it down to 10 cognitive biases that entrepreneurs should be aware of and avoid.
The anchoring bias is a bias towards the first piece of information received about something. This can be seen in our approach to news stories where there is a tendency to believe initial reports as the factual position. Anchoring can lead to hasty decisions that are also incorrect, again consider the news example, particularly in Zimbabwe.
The availability heuristic is almost the opposite of anchoring. It is the belief that the most recent piece of information in relation to a subject is the most accurate. An example of this is the tendency for digital marketing proponents to belittle or ignore older marketing methods and knowledge. As with anchoring the solution is to collect all information before finding a position.
One good turn deserves another – goes the saying. And it’s a well established and psychological fact that people will tend to want to return good deeds. As an entrepreneur, you may need to make decisions that involve working with people or suppliers and base your decision on good deeds that they have done and a desire to reciprocate. All well and good. However, some people can conspire to manipulate you through this cognitive bias.
The more options people have the less likely they are to make a choice. This is choice overload in essence. The most brilliant example of this is the Trevsky Jam study. Again this is a bias to do with decision making. There is no real fix to this one as you are likely to be presented with many options in business. It’s no understatement to say too many. However, it is important to note that the optimal range is 3-4 options for the human mind.
This is perhaps the most dangerous cognitive bias for entrepreneurs specifically and human beings in general. The commitment bias is the tendency to behave in a manner that backs up previous decisions. While this can be very useful when the correct decision is initially made if the initial decision is incorrect this can be disastrous for any person or organization. A good example is Kodak’s insistence on investment in photo printing even though signs continually pointed to digital photography pushing out print. Kodak where early leaders in the digital photography race and the rest history has documented very well.
Confirmation bias is the tendency to interpret data in a manner that supports your position where a more objective look might give a different insight. We have seen many times in Zimbabwe analysts have interpreted signs and statistics as indicators of positive shifts in the economy though totally contradictory to the signs on the ground.
The Dunning-Kruger effect is interesting because it is very difficult to disprove in any situation. It is the belief that you are more competent at a particular thing than you actually are. Objectivity is always compromised in any self-assessment and some things you only learn in practice.
Elimination by Aspects
When making decisions on multiple options it is commonplace to eliminate the alternatives based on aspects one by one. The danger with this sort of process is that while an option may be eliminated because it is not favourable in the early aspects chosen to eliminate by it may be overall the best option. Consider the decision of a service provider such as a lawyer. A particular option may be eliminated early on because of their hourly billing rate but may possess a wider array of areas of expertise, which is only considered down the line when that option has already been eliminated. Again, the decision matrix should look at all variables simultaneously to avoid this bias.
Monte Carlo fallacy
Also known as the gambler’s fallacy, it is the belief that low periods will eventually be replaced by high periods. Believing that all things are cyclical and therefore current lows will eventually be replaced by periods of highs and success. In real life, there is no such thing. Careful analysis of circumstances and their causes must be adhered to. There is no law that mandates that current economic troubles will be replaced by periods of prosperity it is only our decisions that can produce a turnaround.
The representativeness heuristic is the tendency to judge the probability of unknown events based on past seemingly similar events. The simplest way to explain this is using last year’s rainfall patterns as indicative of the probability of this year’s rainfall patterns. The fallacy of this is obvious when it comes to the weather but it may not be so obvious when predicting other things such as consumer behaviour. Projections for sales based on the success of seemingly similar products ignores other areas critical to success with customers such as marketing, sales, payment options and peripheral services.
As I said there are as many as 104 cognitive biases and you would do well to acquaint yourself with as many as possible.