Corporate professionals and entrepreneurs aren’t immune to unconscious biases and cognitive distortions. After all, the same thinking patterns that drive our everyday behaviors also carry over into our work and influence our decision-making.
As Andrew Campbell, co-author of Strategy at the Corporate Level, wrote in the Harvard Business Review, “The daunting reality is that enormously important decisions made by intelligent, responsible people with the best information and intentions are sometimes hopelessly flawed.”
Fortunately, there are systematic ways you can reduce the risk of mistakes. The first step is learning to recognize thinking errors in the first place. Here, we highlight three cognitive distortions that can damage your business strategy and explain how to circumvent them.
1. Confirmation Bias
Confirmation bias is the tendency to favor information that confirms your pre-existing beliefs and avoid and discredit information that contradicts your views.
An example of this is an investor who holds onto a declining stock no matter how far the market plunges. The investor believes it's just a matter of time before the market readjusts to reflect the true value of the stock. The investor clicks on the news headlines that report any positive news, but ignores or dismisses information that provides reasons for concern. As a result, the investor’s money sits in a losing stock for years, and the investor never reallocates the funds to achieve higher returns.
2. Sunk Costs
Sunk costs can lead to similar negative outcomes. The more time, energy, and money we’ve invested, the less willing we are to let go of our initial plan, especially if we feel our reputation is on the line.
The sunk cost fallacy occurs when you watch a movie all the way to the end, even though you strongly disliked it after the first five minutes. But because you paid for a ticket and took the time to drive to the movie theater, you are reluctant to change course, even though you do not get any enjoyment from the experience.
Sunk costs influence a wide range of business situations, from product development to personnel decisions to marketing campaigns. This underlying sense of inertia can inhibit a company from moving forward and adapting to change.
3. Loss Aversion
Loss aversion works hand in hand with confirmation bias and sunk costs.
Studies show that losses have twice the psychological impact of gains. An article in the New York Times frames it this way, “We may like to win, but we hate to lose.”
Sticking with the status quo often feels safer. Once we have a reference point, it can be difficult to start fresh and rethink our choices.
Loss aversion can be especially dangerous in the world of venture capitalism; a firm may continue investment rounds and pour money into a mediocre start-up simply to “protect” their initial investment.
How to Avoid These Pitfalls
Because mental distortions function on a subconscious level, people aren’t usually aware their approaches are flawed. But with some discipline and self-awareness, you can anticipate situations where these errors may occur and implement some checks and balances.
Welcoming debate into your decision-making process is one way to prevent biases from taking hold. Warren Buffet is famous for inviting vocal critics to his annual meetings in order to listen to opinions that contradict his own.
Even if you don’t have a critic who is willing to debate with you, simply turning to an objective third-party source is enormously helpful. According to the Harvard Business Review, “The simple answer is to involve someone else — someone who has no inappropriate attachments or self-interest.” This person can serve to challenge your thinking, assess your logic, and suggest alternate solutions.
In some situations, it may be difficult to find an unbiased point of view within your organization, so it’s often worthwhile to seek outside opinions. Market research providers can help vet important decisions and double check internal analysis through custom research projects and off-the-shelf secondary research reports.
For example, Freedonia Custom Research, a division of MarketResearch.com, often assists companies who are considering new product launches, large acquisitions, or initial public offerings. To help these clients make sound business decisions, Freedonia provides detailed market assessments, trends analysis, and estimates of historic and forecast demand. By offering an unbiased perspective, Freedonia helps clients double check their own analysis and evaluate any potential risks or opportunities they may have overlooked.
Secondary market research reports can also serve as another check point to minimize mistakes — and help you make informed, analytically driven decisions. Among other things, market research reports can help you benchmark performance, evaluate new technologies, and understand the competitive landscape. Instead of relying on your own viewpoint, you benefit from the analysis and expertise of an outside perspective that is grounded in data and current research.
By arming yourself with independent and credible analysis, you can help counteract subconscious biases and prevent costly mistakes.
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Sarah Schmidt
Managing Editor
MarketResearch.com
