Cognitive Biases
Cognitive biases are described as inclinations to think in specific ways that lead people to make poor judgment decisions. The biases have a negative impact on the choices we make. The confirming-evidence trap, overconfidence trap, anchoring trap, sunk cost trap, and status quo trap are a few of the biases (Bazerman & Moore, 2013). Many people think that their point of view is the right one. The standard rationality of a person may be impacted by this view.
The Confirming-Evidence Trap
This kind of bias occurs when a person seeks information to validate an already held preference while discounting the information that goes against it.
In this case, the CFO firmly believes that marketing is a poor way to spend money belonging to the company. This is because someone showed her long ago how marketing did not work. She then confirms that marketing is not a good idea. She goes ahead and cuts off the marketing budget to almost zero in her company. There is a sudden drop in the sales due to the cut of the marketing budget. When asked, the CFO defends herself by saying that there must be other causes for the decrease in sales, but not the cut of marketing.
The managers and the decision makers are encouraged to challenge their assumptions and test their judgment adequately. They should also identify the weaknesses in their thinking and research alternative options (Bazerman & Moore, 2013).
Overconfidence Trap
This type of decision-making bias is demonstrated when the decision maker overestimates the accuracy of something. This is due to strong beliefs towards something. The decision maker does not believe in the possibility of failure.
In this scenario, the CEO wants to expand the company’s market by buying a major rival. He strongly believes that the strategies will double the company’s market share. His top managers warn him that the purchase will require a huge amount of money and the company will need a large debt to cater for the purchase. He is also warned that several of the mergers have failed. He insists on buying the major rival despite the many warnings.
This bias can be avoided through researching, investigating, and understanding all the possible options before making a decision. Criticizing the deal before implementing it may also help with overcoming the overconfidence trap (Bolland & Fletcher, 2016).
Anchoring Trap
Anchoring bias is demonstrated whereby the decision maker relies too much on the first information they receive and ignore all the other information that follows. The decision made is significant on the first information received. The initial information outweighs all the other options.
In this scenario, the CEO has two options to decide on which one to purchase. The owner of factory A brags that the factory produces 94% products that are free from defect. The owner of the second factory tells the CEO that the factory produces 5% defective product. The CEO does not even calculate the percentage of free defective products of factory B. In the real sense, factory B produces a higher percentage of free defective products that factory A. The decision made by the CEO relies too much on the first information received. That is because he was informed first by the owner of factory A.
The leader should practice patience to ensure that he gets all the information before making a decision. After getting all the information, he should critically evaluate all the options and, hence, decide on the best one (Kourdi & Kourdi, 2011).
Sunk-Cost Trap
In this case, the type of bias that the CEO demonstrates is the sunk-cost trap. Sunk cost bias comes about when someone invests so much into something that they are not able to abandon it. In this scenario, the CEO invested much in the research and advertisement of the hybrid vehicle. She is advised to abandon the vehicle to avoid further losses and focus on selling profitable vehicles. She insists on selling the vehicle despite such information. This type of bias is also called “the escalation of the commitment.” That is, someone tries to hold on to a situation instead of progressing with other better decisions.
This bias can be avoided by worrying less about the past and focusing on the present and the future. If the hybrid vehicle is leading to loses, then the leader must make a new decision so that the bias can be corrected. Her mind must be flexible so that she can adjust to the situations. This is because when money is spent inefficiently, it is gone and can never come back. Instead of thinking more about the costs spent on the hybrid vehicle, she should learn to make new decisions that focus on the future (Dennet, 2006).
Another way of avoiding this bias is through effective planning. Before implementing any new project, one should do proper planning and necessary modifications. One should also have in mind that the project may fail; in that case, modification will be required. Therefore, the mind of the leader should be flexible. The leader can only avoid this type of bias through making new decisions. That is, the CEO will have to forget about the hybrid vehicle and continue selling other vehicles that bring profit to the company. Without correcting the issue, the company’s situation will worsen (Bolland & Fletcher, 2016).
Conclusion
The most dangerous bias is the sunk-cost trap. People with this type of bias resist finding the solutions for their problems. This is because they have a fixed mind. They constantly regret their past which prevents them from making progress. A company leader with this type of bias can make the company fail without thinking of the methods that can help (Hammond, Keeney & Raiffa, 2015).
References
Bazerman, M., & Moore, D. (2013). Judgment in managerial decision making. Hoboken, N.J.: Wiley.
Bolland, E., & Fletcher, F. (2016). Solutions. London: Routledge.
Dennet, D. (2006). Breaking the spell. New York: Viking.
Hammond, J., Keeney, R., & Raiffa, H. (2015). Smart choices. Boston: Harvard Business School Press.
Kourdi, J., & Kourdi, J. (2011). Effective decision making. London: Marshall Cavendish Business.
