The Ultimate Business Guide to Cognitive Bias

Cover Image for The Ultimate Business Guide to Cognitive Bias

I am the founder of a company called MYQU. We hope to take the bias out of hiring and make people better at hiring top talent. This made it crucial for me to have an in-depth knowledge of what biases we are likely to face in our day to day activities. So I am not a hypocrite as someone who has been trapped by my own bias repeatedly and working on a product to help others avoid biases.

I’ve been reading books on psychology, spending nights going down YouTube rabbit holes and taking lots of lessons and notes from one of my fellow board member Adam W. Meade. Dr Meade specialises in quantitative analytic methods and psychometrics applied to the workplace and is the most cited in his field; He is a Professor in the Department of Psychology at North Carolina State University. His research has opened so many ways of new thinking to me.

The focus of this article is repeatable results; when we trust our instincts, we usually get more random results than we would expect. This is because we get very different outcomes depending on the whole host of random variables that come from social situations every day. Hopefully, by understanding how the variabilities can affect our thinking, we can overcome them. This article will hopefully shed some light and introduce some of the most common biases we face in running businesses day-to-day. By leaning into and understanding these biases, we can make fairer, more precise and more consistent decisions every day.

What is Cognitive Bias?

Cognitive bias is a flawed way of thinking that leads to incorrect assumptions or conclusions. Experienced by everyone every day; however, many are not aware of them when they happen. These biases come naturally to our train of thought and are our mind’s way of keeping us confident. Our brains love patterns and use prior knowledge to make new decisions. If left with too little information in a decision, we will resort back to using past experiences. Or we may decide out of self-interest. As humans, we are constantly trying to make sense of the world around us. We also always want to make the right decision, which can often rely on cognitive biases.

Our brain tries to take these shortcuts pretty frequently. Whenever we experience the mental distress that making a decision can produce, we want to find a solution as soon as possible. However, cognitive biases prove to be highly inaccurate almost all the time.

It is essential to know about the most common types of cognitive bias so that you can recognise them when they arise and prevent poor decision-making. Doing so could lead to better relationships, higher levels of success, and increased self-awareness. There are over one hundred different types of cognitive bias.

Although cognitive biases will always come naturally to us as humans, simply recognising and actively trying to think alternatively about them is a great place to start mitigating their effects.

In the workplace, cognitive biases can lead to issues in the hiring process, group meetings, performance reviews, and team projects. It results in managers giving some an unfair advantage, team projects going awry, and a skilled individual not getting the job.

Cognitive biases pave the way to our minds potentially relying on prejudices to predict outcomes, which can be detrimental to a business.

This article covers the most common types and how we can remedy them in business.

Types of Cognitive Errors and Application to The Workplace

Self-Serving Bias

Self-Serving Bias is a cognitive bias that occurs because we want to boost our confidence. Self-serving bias says that if a positive outcome occurs, this is due to our skillset. However, if a negative result occurs, this is due simply to bad luck. We desperately want to protect our ego and do not want to accept fault. Instead, we’d attribute our mistake as outside of our control rather than take it as our own.

An example of this in the workplace will be if a new hire does well. The hiring manager would then state that this was due to their excellent hiring skills. However, the hiring manager could equate this to bad luck if a new employee does poorly.

Confirmation Bias

This bias exists because we want to affirm what we already know. In doing so, we will ignore any new contrary information. We tend to build up a view of how something is and want to stick to it. However, if something comes along that threatens this worldview, it is safer to ignore it.

An example of this would be if a manager perceives an employee a certain way in business. If the employee begins to act contrary to this belief, the manager may ignore this to keep their existing perception.

This can also prove dangerous in investing. For example, if a stock performs wonderfully but begins to slip, the investor may still hold on due to its previous track record.

The best way to counteract this bias is to continually keep an open mind and actively pay attention to contradictory information. Looking at all data, good or bad, is a great way to make better decisions.

Recency Bias

Focusing on recent events more so than previous events is recency bias. We tend to see the most recent events as more important or what we should base our decisions on rather than the big picture of combined current and past events.

For example, an employee was late yesterday for the first time but has been on time to work all previous days. However, their manager now perceives them as employees who slacks off and will be late. This is recency bias because that manager failed to perceive previous positive events.

Hindsight Bias

We experience hindsight bias because we want to reduce how unexpected life can be and feel in control. Hindsight bias is when you believe that you predicted it after an event and expected the result. However, before it occurred, it was unseen.

If your company launches a new product that turns out not to perform very well in business, you state that you knew that it would not do well. You can then see why it did not do well, and you believe that you saw these all along.

Or, if you predict an outcome, you attribute this to your skill rather than a random guess.

Bandwagon Effect

The bandwagon effect, a widespread bias that we all face, says that if a group of people chooses something, you are more likely to choose this option. Therefore, if others are “hopping on the bandwagon”, you likely will too.

In a group meeting, others may all agree on an idea for a project. However, you have a completely different idea that would be more efficient. However, since everyone else has the other view, you will likely abandon yours because it would be tougher to pursue your unique idea.

The human mind does not like to be an outlier. It loves to be a part of something and hates exclusion.

It would be helpful to make yourself or your team more comfortable with presenting contradictory ideas. Celebrate differences to reduce the bandwagon effect.

Anchoring Bias

Basing your perception of new data on previous data is Anchoring Bias. Anchoring bias is one of the best psychological tools marketers use on you all the time.

For example, if we see an item priced at €30 and another company sells it for €15, we think the second option is cheap. However, if you now know that item first at €10 then at €15, you will believe that the second option is expensive.

We want to stay accurate to any targets we create no matter how other information deviates from these original targets.

Fundamental Attribution Error

Blaming others rather than looking at the whole picture is the fundamental attribution error. We do not want to look inward at ourselves objectively, and we tend to blame others for making ourselves feel better.

If you are working on a project with others and it is not completed before the due date, you may believe that your coworkers are lazy. However, it could be due to other outside circumstances or even your fault.

Conservatism Bias

Conservatism Bias is the opposite of recency bias. Conservatism bias states that we favour old, pre-existing info over new, essential changes. We want to see patterns and consistencies where there are none.

For example, an ad campaign has seen great results in increased sales. However, in the last few days, these rates have been plummeting. The manager may be inclined to ignore new data due to the past track record of the campaign instead of looking further and accepting the possibility that the drive is no longer working.

Just because something has been one way in the past does not mean it has to be the same in the present or future.

Halo Effect

The halo effect is almost self-explanatory; you perceive someone as overall positive and assume that they will automatically be good at one thing if they are good at one thing. Looking at their history, this person could be viewed as almost an angel, hence the name of the halo effect.

An example of this would be a favourite employee who always does well no matter what they are tasked with. The manager may assume that they will also do well at a new task. However, the employee may struggle with one unrelated to their skillset.

Favouritism happens all too frequently in the workplace and is a typical halo effect.

I’ve seen this happen quite a few times with the best engineers promoted to become terrible managers or to go easy on someone in an interview because they look great on paper, and I’m sure you have noticed it in businesses you have been in too.

Projection Bias

This is projection bias when we assume that everyone else thinks the same way as us. We can apply this to thinking that people want things like yourself or have the same aspirations.

If a manager wants to relate to their team accurately, they need to make sure that they are not making any assumptions that the people in their group are exactly like them or think just like them. Therefore, it is crucial to keep an open mind and continually adjust to remind yourself that a “normal” way of thinking does not always match your own.

Or a leader could assume that an employee would like to work on a project related to HR because the leader loves HR. However, that employee feels the opposite.

Framing Bias

This bias is another fallacy of perceiving information. You could be delighted or glum to hear information depending on which side you hear.

For example, what if you were told that 30% of people did not buy your product. In receiving this news, you would be sad to hear that you missed out on that many people. However, if you are told that 70% of people buy your product, you will be excited by numerous sales.

Overconfidence Bias

The overconfidence bias is when someone believes that they have the greater skill, luck, or talent than reality. As a result, this can result in overestimating yourself and your reasoning. If we aren’t careful, this can prove detrimental in business, gambling, and investing.

You could believe that you know the best timing for buying a stock, placing a bet, or releasing a product. However, you may quickly find out that the opposite is reality.

Loss Aversion

The fear of losses. Loss aversion usually grows more extreme the higher the risk or more failure you experience.

Sometimes, a loss is required to receive a profit. Many investors experience a loss here and there. However, it is essential to look at the overall profit picture instead. In experiencing loss aversion, the investor would want to avoid loss at all costs, not to make the potential profit.

Becoming comfortable with loss and looking at the big picture is essential. For example, would this loss allow for higher returns in the future?

Solutions

Although many of these cognitive biases may seem unavoidable, there are quite a few ways that you can avoid or lessen them in your own business or at work.

Knowledge

Simply educating yourself and others about these biases is the first and most crucial step to avoiding them. If you recognise them in yourself, you can shift your thinking not to give in. If you remember them in another, help educate them as well.

Cognitive biases can often be the downfall of a great company. However, businesses can significantly set themselves apart from other companies by being aware of these fallacies.

Question

Continually question yourself and others. If you always stop and ask yourself great questions, it can root out many cognitive biases before taking effect. Not only should you question others, but you should also have others question you. Make them aware that you are trying to avoid cognitive biases to call you out if you are portraying one.

You can ask questions like:

“Why do I predict this event will occur?”

“Why did I choose him/her for the job?”

“Am I truly qualified to do this job or make this prediction?”

“Do I have an alternate idea than the group?”

“What does this new data mean?”

“Am I making this decision due to past experiences?”

“Am I overconfident?”

“Do I have self-interest?”

“Is there any bandwagon bias occurring within this group?”

“Am I looking at the full picture, or was info ignored?”

“Do I need more information to make a fully educated decision?”

Stay Open-Minded

We all believe we are open-minded, so this is easier said than done. However, you can always see things for what they are and inspect any contradictory information.

In teamwork, open-ended brainstorming sessions are fantastic. Make sure that facts and logic back these up and that everyone has a chance to share their thoughts. Making your whole team aware of cognitive biases and pointing them out as soon as they arise beneficially can help reduce them. However, it may also prove helpful to have an organised structure for meetings and decision-making. This way, it is easier to see discrepancies that may be cognitive biases.

Be sure to allow many different people from many ways of thinking to join your team. With more diversity, the better the results. This may mitigate the bandwagon effect and allow for individuality and unique ideas. You want your ideas challenged, and you want to challenge others’ opinions. When we all work toward the same goal, this will only lead to a better outcome.

Train

It can prove helpful to take the time to train managers to be aware of these fallacies if they will be doing performance reviews, hiring, or firing. Managers need to make sure that they evaluate based on the correct criteria and not rely on cognitive biases. An excellent way to see the whole picture when assessing an individual is to ask others who have been around this person.

In general, everyone in the organisation should know of cognitive biases. Making sure that everyone is on the same page will result in a more conscious company.

In addition to training others, you must prepare yourself to become comfortable with uncomfortable data. It would help if you also made it a habit to check yourself for biases.

Takeaways

It is impossible to root out all cognitive biases and banish them from your mind. However, taking note of them and actively scrutinising them allows for a more positive mindset. You can choose to change how you view the world and others around you.

Many of us are not aware of the way that we can think. Psychology is complicated, and by nature, humans love patterns, protecting their confidence, feeling like the norm, and being right. Cognitive biases arise due to our minds adapting and trying to make sense of the world. Reality is messy and rarely fits into moulds or patterns. However, we desperately want it to. Using prior knowledge to come to a new conclusion can be helpful on occasion and result in incorrect, ignorant decisions other times.

Making yourself and others aware of common cognitive biases can result in better outcomes for everyone.

Written by Niall Maher

Articles and thoughts on running a tech startup and building stuff that people love to use. Founder @ MYQU. Subscribe to my newsletter for new articles and posts I find interesting here.