August 2016 Business SCAN
Cognitive biases are often a result of our attempt to simplify information processing. They are rules of thumb that help us make sense of the world and reach decisions with relative speed. These personal rules are very often unconscious.
In the management context, research refers to them as the “CEO toolbox”. It develops over the course of a manager’s life and enable managers to routinely complete recurring tasks and to be able to quickly diagnose new ideas and topics. These rules are basically characterised by the manager’s need to take swift actions.
While biases can often be surprisingly accurate, they can also lead to errors in thinking. Yet very few corporate strategists making important decisions consciously take into account their cognitive biases.
In times of uncertainty and when facing overriding emotions in the industry such as “fear and worry”, it can be even more vital for strategic decision making leaders to recognise their own biases.
|Drive us to take action less thoughtfully than we should|
|Misaligned individual incentives
Misaligned perception of corporate goals
|Arise in the presence of conflicting incentives, including non-monetary and even purely emotional ones|
|Confirmation bias (favoured belief)
Generalising based on memorable examples
Assessment of ideas depends on who introduces them
|Lead us to recognise patterns even where there are none|
|Anchoring and insufficient adjustment
Sunk-cost fallacy (historical costs vs. future action)
Status quo bias (no pressure for chance = no chance)
|Create a tendency toward inertia in the presence of uncertainty|
|Groupthink (striving for consensus)
Sunflower management (groups align with the views of their leaders)
|Arise from the preference for harmony over conflict|
Sources: Sources: Madique, M. (2011). The Leader’s Toolbox. Unpublished manuscript; Lovallo D. and Sibony O. (2010); The case for behavioural strategy, McKinsey Quarterly 2010, [Online]. Avaliable: http://www.mckinsey.com/business-functions/strategy-and-corporate-finance/our-insights/the-case-for-behavioral-strategy, [20 July 2016]; Nagel, C. (2014) Behavioral Strategy. Thoughts and feelings in the decision making process. The unconscious and the company’s success, Unternehmer Mediien GMBH, Germany: Behavioral Strategy Institute.
Assess the five overall types of cognitive bias in the table below. State for each category how likely you find yourself to be influenced by this type of bias (ranking 1-5).
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