Cognitive Bias: What it is and How to Overcome it

image showing an idea board

Cognitive bias is a term used in psychology to describe how our personal biases influence our thoughts, feelings, and behaviors. These biases can harm business when they lead us to make decisions based on inaccurate information or assumptions. From my podcast interview with Dr. Gleb Tsipursky, a cognitive neuroscientist and a behavioral economist, author of best-selling books, amongst them is Never Go With Your Gut and the founder and CEO of Disaster Avoidance Experts. I want to explore three cognitive biases in more depth and share some tips on overcoming them.

What is Cognitive Bias?

The idea of cognitive bias was formed in the  1970s by Amos Tversky and Daniel Kahneman, psychologists who studied why people have trouble reasoning and judging fairly in particular circumstances. Paul Slovic, a psychologist, collaborated with them on their early findings, which they published in “Judgment Under Uncertainty.”

Cognitive bias is a term used to describe certain mental mistakes caused by our limited capacity to analyze information objectively. It can result in illogical and baseless judgments and an inability to assess risks and threats.

The researchers explained that cognitive bias is the inclination to make judgments or take action illogically due to our attitudes, memory, socialization, and other personal traits. There are several biases that have an impact on a wide range of activities, including decision-making, evaluation, beliefs, and social interactions.

According to Dr. Gleb Tsipursky, cognitive biases are “mental errors humans make in processing information because of how our brains are wired. These lead to judgments that deviate from a rational and unbiased perspective.”

Cognitive biases can be subtle and hard to detect, which is why it’s essential to be aware of them. Here are some common cognitive biases that Dr. Gleb discussed:

3 Cognitive Biases Hurting Your Business

There are many different cognitive biases, but here are four of the most common ones that can hurt your business:

Planning Fallacy

The planning fallacy is a cognitive bias that leads people to underestimate the time, costs, and risks associated with future actions. Kahneman and Tversky first proposed the planning fallacy in 1979. They explained the phenomenon by suggesting that people focus on the most optimistic scenario for a task rather than using their experience of how long it actually takes.

The planning fallacy occurs regardless of our experience with similar tasks in the past. Even though we know the task has always taken longer to complete, we still underestimate the time it will take in the future. This bias can lead to problems because it can cause people to Undertake projects without realistic expectations about the time and resources required.

As a result, the project is more likely to be delayed, over budget, and less effective than initially predicted. The planning fallacy is a common source of error in personal and organizational decision-making, and it’s important to be aware of it to avoid its effects.

This is evident in Dr. Gleb’s example of an entrepreneurial company that opened to address the issue of the planning fallacy. They were making overly optimistic estimates on how much something would cost when bidding for a heavy manufacturing project. This often led to underbidding by millions forcing them to make fewer profits than anticipated. The reason why this happened is that they didn’t take into account their previous experiences with similar projects. In other words, they didn’t have a reference point to go off of and cognitively biased themselves.

One way to overcome the planning fallacy is by using reference class forecasting. This is a method of estimating the probability of future events by looking at similar events in the past. Using this method, we can avoid cognitive biases and make more accurate predictions.

Sunken Cost Fallacy

The sunken cost fallacy is a cognitive bias that dictates our decision-making. It tells us that we should continue investing in something as long as we have already invested so much, regardless of whether or not it is actually worth our time or money. This bias can lead us to make suboptimal decisions in our personal and professional lives.

For example, we may stay in a dead-end job because we have already put so much time into it, or we may continue investing in a failing business because we can’t bear to see our initial investment go to waste.

The sunken cost fallacy dictates that the more we have invested in something, the more reluctant we are to give it up. However, sometimes the best course of action is to cut our losses and move on. By acknowledging the sunken cost fallacy, we can be more mindful of its influence on our decision-making and avoid making choices that are not in our best interests.

Optimism Bias

The Optimism Bias is the cognitive bias that causes people to believe that they are more likely to experience positive events and less likely to experience negative events. The optimism bias is often seen as a positive thing, as it can help people remain hopeful under challenging situations and persist in the face of setbacks. However, the optimism bias can also lead people to make irrational decisions, as they underestimate the likelihood of negative outcomes. 

For example, Dr. Gleb shares about a tech startup founder who was to get coaching from him once his company’s equity reached $10 million. However, during the SWOT analysis that Dr. Gleb conducted, the entrepreneur failed to list delegating tasks effectively as an area of weakness. Though it was clear that this was a point of concern for many investors, he was very defensive when confronted with the issue. It wasn’t until Dr. Gleb showed him how his optimism bias was harming his company that he was able to let go of control and allow other people to do their jobs. Without this guidance, many entrepreneurs make the same mistake, and their businesses suffer as a result.

Overcoming Cognitive Biases

Cognitive bias is a powerful force that can majorly impact your business. This type of bias occurs when our brains make judgments and decisions based on emotions or past experiences rather than logic or reason. 

To overcome these biases and make more informed decisions, it’s essential to be aware of them and understand how they work. We’ve outlined three cognitive biases that are particularly harmful to businesses and provided tips for overcoming them. Are you ready to start making better decisions for your company?