Tag Archive for 'management'

Decision Making: Cognitive Biases

Decision making is one of those concepts that many people try to simplify when it fact it’s complex and must be treated in a multi-dimensional manner. There are many forces in play and today, I wanted to summarise a few cognitive biases that are involved. By knowing these exist, you can start to make better decisions.

  1. Sunk Cost Bias: Escalate the commitment of previous time, effort and money. Cutting your losses is harder than it appears. Trying to calculate marginal costs (forgetting about what’s already been spent) is a lot harder than it appears. Gamblers are notorious for abusing this bias when they are down on their luck. Sports teams will keep playing top salaried players even though they under perform lower paid players. Everest climbers have what’s called the turn around rule (when it gets too dangerous to continue) yet many who die ignored their own safety rule.
  2. Over confidence Bias: We are all systematically over-confident, hopeful and enthusiastic. When asked, 80% of people will answer that they are above average in something when statistically it’s impossible.
  3. Recency Effect Bias: An over reliance on recent events and activities will sway your decision making – much like a hot streak in sports or gambling.

There isn’t ONE thing that affect decision making, but a multiplicity of biases. On Mount Everest people die when they make a bad decision.

In business, the same is true. 80% of bankruptcies are due to management incompetence = poor decision making. The trouble is that unless you are aware of the REASONS for the mistakes, they will be repeated over and over and over again.

Today’s post is one of the many steps you need to make to improve your decision making. It’s always going to be a work-in-progress because there is NO silver bullet or perfect decision making process or ‘system’.

You have to find your optimal strategies to counteract biases and other obstacles.

Just remember you’re aiming for an optimal solution – not a perfect one.

That means the best solution “under the circumstances”…