Each and every day we make thousands of decisions. Some are small and so routine that they roll in our subconscious state – drawing little to none of our attention. We are unaware of these decisions unless something “jerks” our attention to the situation: such as a road closure preventing us taking our standard route to work, the deli being out of our favourite sandwich meat or when we are distracted leaving the house (did I lock the door?).
Alternatively, some other decisions we are very aware of, and dedicate a large portion of our consciousness to them. We consider the possibilities and potential resultant outcomes before making a decision.
However, even when we are conscious of these decisions, we are susceptible to cognitive biases in our brain. The brain uses bias to either save effort or manufacture and produce confidence in our decisions.
Psychologists Daniel Kahneman and Amos Tversky have researched how these decision biases impact our ability to make decisions. They identified the four major cognitive biases as overconfidence, biased judgement, herding, and loss aversion.
Their research has impacted many industries including the finance industry, an industry that utilises formulas and predetermined processes to prevent irrational, emotion lead behaviour affecting results.
There is certainly benefit in us all having clear processes in place to prevent these inherent biases from impacting our decision making. They can help to ensure that decisions we make are rational. These decisions may not be correct all the time, however, they are not incorrect due to irrational thinking. Implementing set processes ensures that we don’t make stupid errors related to momentum and excitement, and can prevent the “confidence hit” we take from a loss impacting our “next move”.
Overconfidence: What is it?
Overconfidence relates to human beings’ inherent tendency to overestimate our abilities and beliefs. We can also be overly optimistic in our assessments of the future. This can lead to overvaluing of our own ideas. This can lead to subconsciously dismissing potential risk whilst heavily scrutinising the ideas and prospects of others.
Two examples of this can be seen in a series of experiments which asked participant groups “how are your driving skills compared to the average person?”. Repeatedly, 80-90% of participants reported they considered themselves better than the average, which can’t possibly be true as the maths simply does not equate.
Another series of experiments asked college roommates to describe how they saw their life playing out, and then their roommates. Results showed that individuals were very optimistic about themselves (describing good careers, strong marriages and good health). However, they were much more likely to describe their roommates as experiencing a relationship breakdown, poor health or career setback.
So how does it impact us? In a team setting, overconfidence can limit our ability to productively contribute to group decision making. It can lead to downplaying the ideas of others compared to our own, and an inaccurate review of possible outcomes of our decisions. This can be include not considering all of these potential outcomes, leaving us vulnerable to preparing for all situations.
What to do about it:
- Always put a gap between making the decision and “ticking off on it”. Give yourself some time to “cool down” and stop the momentum. A clear head will help you recognise and reflect if all options have been considered.
- Ask yourself “What would I think of this idea if a colleague or friend “pitched it to me?”. Removing your “ego” from the situation can help to review how others may perceive this work and identify potential gaps.
- Have someone else check your work. Ask another trusted person review the decision in regards to strengths and work areas. This can help you recognise where you may have been overconfident and what you may have “skimmed over”.
Biased Judgement: What is it?
Sometimes we attribute the outcomes of certain results or patterns to a relationship which doesn’t truly exist. This means we can begin to “bias” probability with our own emotions. We can combine the probability of different events, thinking that they are linked.
For example, if you were going to flip a coin ten times and the first four times were heads, you may convince yourself that the fifth “will surely be tails”. This is not true, as each flip is completely independent of each other. In reality, you are just as likely to have a pattern of HHHHHTTTTT as you are more diverse pattern such as HTHTHTHTHT.
We need to ensure that we actively reflect on the decision making process. This requires identifying any potential “biased” decisions, as well as making sure the relationships or causations we have used to build that decision are accurately constructed.
Therefore, we need to ask ourselves: Have we developed the belief that a particular outcome has occurred based on previous results (e.g. the last 4 flips of a coin)? Or are we looking objectively at current data (the result of this flip is independent of what has previously occurred, and therefore we are unable to reduce risk)?
How it can impact us? Biased judgement can lead us to assume rather than consider. It can also lead us to focus on facts which, although related to the decision, are irrelevant. It can lead us to focus on one particular aspect and discredit the other variables related to the situation.
What to do about it:
- Prior Preparation Prevents Poor Performance: Ensure you spend enough time defining the “problem” and identifying all the relevant parts to the situation before going straight into “problem-solving”. Seventy percent of the time should be spent on planning with thirty percent on executing.
- Consider each component of the decision independently as well as part of the overall decision-making process. Ask yourself am I considering this information in isolation? Or are other factors influencing my bias?
- Listen to your gut, decide with your head. Let your “intuition” bring potential answers and ideas to the “decision making table”. However, make sure the final decision has been considered and supported by evidence.
Herding: What is it?
A common theory is that “groups make better decisions than individuals”, however, this is only part of the story. If not conducted in a proper manner, groups can actually make poorer decisions than individuals.
Social pressure and “group-think” can actually influence individuals to believe incorrect things. Group-think refers to a desire for harmony or conformity in the group, and can result in irrational or dysfunctional outcomes. “Herding” is where the stronger voices or the majority of the group influences the others through pressure and this group-think mentality – rather than through logic.
Efficient group decision making should focus on the sharing of information and group discussion. It should highlight the differing factors of a problem that need consideration and bring out different perspectives. Group decision making should put all perspectives on the table before reaching a verdict.
How it can impact us: Herding can make group decision making detrimental to the end result, rather than the optimising beneficial opportunity it provides. It can prevent us from contributing as individuals, and considering the evidence and information for ourselves. Instead, it can lead to think like the rest of this group and prevent us from thinking independently.
At times, herding is the plural term of overconfidence, whereby the energy and momentum of the group can lead people to focus on and overemphasise the positive outcomes or possibilities of decisions discussed, and not appropriately consider the risks.
What you can do about it:
- Many high-performing teams insist that the individuals have independent time prior to coming together. Then, they can analyse, reflect and construct their own perceptions of the problem, or potential solutions . This ensures that all perspectives are unique and not “biased” by how the content is presented during the group decision.
- When in a group, ensure that you actively take part in asking all participants to contribute their perceptions early in the conversation. This will limit the possibility of individuals being too influenced by the group before adding in their opinion.
- If as leader of the group, your judgement holds tremendous weight, encourage others to provide their opinion before yours. Also, ensure that meetings occur without your presence for other members to discuss differing opinions and ideas.
So where to from here?
The three described biases above are only some of the ones impacting our decisions. There are many more such as loss aversion, pride and regret; all of which can reduce our ability to employ a rational decision-making process. It is important to remember that not all of the above may apply to you personally, and some may apply at different times.
Take a moment to consider the impact of the above biases. If you and your team had a great financial year and are planning for the next, have you considered options through a rational lens? Or has overconfidence and herding lead you to be run by immediate reactions and “gut feeling”?
It is a trained skill to learn and apply the above skills daily. Sometimes, it can feel overwhelming and you may be lost in the depths. The Veretis team has extensive experience helping executives and teams alike implement decision making processes. This provides insurance that important decisions made are based on rationale, not bias.