"Trust your instincts."
It's a common phrase we hear in business, but what happens when those instincts are clouded by cognitive biases we don't even realize we have?
Decision-making is one of the most critical aspects of leadership because it sets the direction for an organization and determines its success or failure. Decision bias can significantly impact an organization's success. For CEOs/ Senior leaders, it's crucial to recognize and address these biases to make sound decisions.
"The more we learn about ourselves and our biases, the more we can mitigate them." - Daniel Kahneman, psychologist and Nobel laureate.
There are many types of decision biases that we can encounter, but here are some of the most common ones:
Confirmation bias occurs when we seek information confirming pre-existing beliefs and ignore information contradicting them.
Anchoring bias happens when we give too much weight to the first piece of information we receive and need to adjust our decision-making process based on new information.
Overconfidence bias is when we overestimate our abilities and believe we are more capable than we actually are.
Availability bias is deciding based on the most readily available information/resource rather than considering all relevant information/resources.
Sunk cost fallacy happens when we continue investing resources in a failing project because we've already invested a lot of time or money.
Groupthink is when we and our teams make consensus-based decisions without considering dissenting opinions or alternative viewpoints.
The halo effect is when the positive impression of a person or company based on a single positive attribute is given more weightage, and we ignore other important factors.
A classic example of decision bias is the case of Kodak, to stick with film photography as it saw digital photography as a potential threat to its traditional film-based business model. This was a combination of different biases, including the status quo bias, the sunk cost fallacy, and the failure to recognize the significance of new technologies.
Which decision biases can you recognize from your past experiences, and what impact did they have?
Understanding and working to counteract these biases can help us make better decisions and lead our organization to success. This may involve seeking out diverse perspectives, considering a variety of sources of information, and being open to changing our minds in light of new evidence. By doing so, we can make more informed and rational decisions, less likely to be influenced by biases that may lead us astray.