8 cognitive biases that stop you making the right business decisions

Small business owners sometimes overlook the intrinsic human biases that can influence strategic decision making. It’s important to be aware of these and to find ways to mitigate them.

Here are some common cognitive biases to be mindful of:

1. Confirmation bias

This is the most common bias and is held by most of us.

Once our mind is made up, we stick with it. We don’t like to change what we believe because we don’t want to accept we were wrong to begin with.

We also seek out information that reinforces our opinions and ignore any that contradicts them.

This can lead people to become convinced that what they believe is true even when the evidence strongly suggests they are wrong.

This bias can make business leaders unwilling to change their view of their product (where they may have an emotional attachment) or their strategy. They may be convinced it’s right even when the signs show it isn’t. This creates a barrier to change.

To overcome this position, business managers should actively seek out a diversity of perspectives. They should encourage honesty and constructive criticism. And they should be open to looking at the facts before reaching a conclusion.

2. Anchoring bias

This happens when people rely too heavily on an initial piece of information and use it as a reference point when making subsequent judgements or decisions.

Say you come across a competitor’s price point. You may use this as a reference for how you set your price. This is despite other factors which you should consider. For example, the quality of your product, its unique features and the overall value it offers your customers.

Because of this bias, you could unintentionally undervalue your own product.

When developing or refining your business strategy, it’s important to re-evaluate without this anchoring bias.

Any preconceived notions or initial assumptions should be challenged or stripped away so a truly objective solution can be found.

3. Availability bias

This is the tendency to rely on information that is easily available or readily comes to mind. It risks overlooking other (potentially relevant) data and could lead to hasty (and incorrect) decision making.

For example, you may see a successful advertising campaign for a product similar to yours. When devising your marketing campaign, you may think you need to create something similar. This can influence your decision making and you may neglect other useful information that could lead to a better marketing outcome.

As a business leader, you should seek out a variety of data sources and do thorough research. Don’t rush to a decision if you haven’t collected enough information.

4. Overconfidence bias

It’s easy to overestimate our skills, knowledge and experience.

The problem with this bias is that we can become too optimistic about the potential success of our product strategy. Equally, we can underestimate its risks.

An example of this is when business managers argue their customers don’t know what they want and that they (the business managers) know better.

They may draw on the famous quote commonly attributed to Henry Ford, the automotive industry pioneer who launched the Ford Model T – one of the first ever mass production cars. He is said to have stated: “If I’d asked people what they wanted, they would have said faster horses.”

What this argument misses is that the customer was making clear enough the problem they were facing — and which companies should be looking to solve. Their problem was that the transport they had was too slow and they needed a faster solution.

Business leaders should always be open to learning and creating a culture which thrives on finding new ways to address customers’ pain points.

As Socrates famously said: “All I know is how little I know.”

5. Sunk cost fallacy

This is when a business leader is reluctant to abandon a strategy because they’ve invested heavily in it. This is despite the fact that it would be logical to let it go.

It can also relate to situations where a business owner rushes to shut down a business division when restructuring may have been the answer.

When previous investments have been made, it may cloud your judgement. It’s important to guard against this.

6. Bandwagon effect

Effectively, this is herd mentality and following the crowd rather coming to your own objective conclusion.

Following trends or copying competitors can be risky. You need to understand the unique needs and circumstances of your own product and market.

7. Outcome bias

This is when we judge the quality of a decision purely on its outcome. We ignore the process that led to that result.

Here’s an example. A (poor) manager might make a decision based on ‘gut instinct’. This is despite his team advising him to make a different decision. If the result is positive, the manager will think his process was correct even though his team’s rationale may well have been right.

The problem with this bias is that it neglects proper evaluation. It also fails to take account of factors beyond your control (and which may have influenced the results). And it can lead to repeat poor decision making.

Informed decision making will always serve you better.

8. Attribution bias

This is also known as blame bias. It’s the tendency to blame people or circumstances for anything that goes wrong instead of looking objectively at the causes.

Often it’s when we mistakenly diagnose system problems as people problems.

‘Don’t shoot the messenger’ is an example of this bias. Bearers of bad news can find themselves in sticky situations because they’re treated as being responsible for the negative news.

This bias is also linked with self-serving bias. For example, an athlete may think their good performance is all about their talent but a poor one is because of some external issue, like bad weather.

Blame bias can be bad for business. When people are unfairly blamed, company culture can be undermined. People may collaborate less or be afraid to take risks to innovate.

Companies can also miss out on learning and improvement. In a culture of blame, failures and setbacks are not properly analysed. This means they are unlikely to be fixed.

Fostering a culture of accountability and learning can overcome blame bias in business. It can also help encourage open and honest communication.

Businesses should embrace failure as an opportunity to improve. They should focus on systemic analysis rather than individual blame.

For further reading, see the following books:

Influence: The Psychology of Persuasion by Robert B. Cialdini

Thinking, Fast and Slow by Daniel Kahenman

Never Go with Your Gut: How Pioneering Leaders Make the Best Decisions and Avoid Business Disasters by Dr Glen Tsipursky

Blindspot: Hidden Biases of Good People by Mahzarin R. R. Banaji