Starting a new business from scratch has never been easy and not recommended for faint hearts. In our previous posts, we‘ve looked at the importance of critical thinking skills to innovate and take decisions and we have also discussed examples of how some companies fail to disrupt. The truth is that decisions are a human-based which is fraught with inherent biases that affect the quality of our judgment. The bias of our mind is called “cognitive bias” which is a systematic error in thinking that occurs when people favor in their personal experience into a decision without properly putting it on the merit scale.
Our human brain is a powerful tool but you can easily handicap it. Cognitive bias is a byproduct of the brain where the brain uses previous data and experiences to make the decision quicker and simpler. This decision is influenced by internal beliefs, past experiences, social pressures, individual motivations, and emotion which limit our ability to think clearly.
To make better decisions as innovators, we need to understand these biases so we can mitigate their effects. Therefore, we mustn’t fall in the cognitive bias trap that our brain sets up for ourselves. According to research by Kahneman and Tversky (two recognized psychologists), the brain works in two possible ways:
- Fast way: Produces automated decisions based on intuition and subconscious “mental shortcuts”. Biologists call this region the “reptilian area” and its focus is simple, avoid pain and keep you alive, most of our reactions when driving a car.
- Slow Way: Produces non-biased decisions based upon logic and conscious deliberation. It allocates attention to complicated mental activities like choice and concentration when you carefully compare different strategies to develop a new offer or select a new market.
Most of the biased decisions are based upon the fast way taking over the slow way. The two psychologists ascertained that most decisions of the untrained mind are based upon heuristics “common-sense rules” which often sides with a short cut and illogical methodologies. This is because it is easier for the brain to process and therefore it takes the path of least resistance.
However, this path of least resistance often doesn’t have questions that help you avoid a biased decision. Let’s go deeper into the most common ways your brain tricks you as innovator into making decisions based on cognitive bias and methods to outsmart these short cuts.
Planning Fallacy
Of course we will do it faster than everyone else. The product will be launched in 6 months”
I recall this one time, we worked hard to pitch a new idea to an innovation board. We had all the charts, graphs, and an awesome PowerPoint. We were ready to present the work on which the next six months were predicted. We flowed seamlessly in that boardroom meeting and claimed that the first version of the product will be ready in six months. The pitch was to get funding for the development of 1st MVP (minimum viable product). The presentation was great but not a single soul in that boardroom believed in our planning. We were told to go back and rework our timing targets for the next board meeting. This is a classic example of fallacy planning, overestimating our team’s capability.
We as intrapreneurs have a natural tendency to set up unrealistic deadlines and fall short once we go in the practical sphere. The same mistake has been made by car making tycoons as Tesla or the Sydney Opera House construction that was expected to take four years. It took 14 years.
Innovators who are defining a timeline for themselves, often create unrealistic timelines because of this fallacy biased. This can usually kill a project easily as investments start melting once the actual timeline exceeds the proposed one. It is the most common mistake as we are doing something that has not been done before and has no reference.
How to outsmart Fallacy Planning
Murphy’s Law should be your thumb rule as something will go wrong. Therefore, you should always consider a tire change time once allocating timelines. The timeline decisions should be based purely on logical calculations rather than your historic ability to carry out a certain job or task, check to discuss with others and benchmark other projects timing.
You can use timeline software or just excel with concrete documentary evidence to back your timeline. You must always add ‘fat’ or extra time to your timelines to cater for unforeseen delays that you know nothing of while the time of starting.
Sunk-Cost Fallacy
We had invested 5 years working on this product, we can’t stop now. We need just another year”
This phrase is a classic from my fieldwork with intrapreneurs. Sunk-cost fallacy happens when you have invested in a project or product for a long time without success and you are still willing to wait and invest even if the evidence confirms that project is not going to take off. The problem with waiting for a dead project is that it costs money exponentially. However, our brains make us believe that everything will go fine even if logic is in our face defying our thought process.
Sometimes, never give up attitude is the start of your downfall. You think all you need is to push a little more whereas the wall never budged from the very start. Once you start working on a specific project, you develop an emotional bond over time which is very difficult to let go. Do remember that the success of an idea is not always directly proportional to the amount of money or time you spent in it.
How to outsmart Sunk-Cost Fallacy
The first question you should always ask while initiating a project is that is it worth putting all eggs in one basket. Once you do this, cognitive bias settles in and you decide to stay in longer rather than pulling out earlier. Testing different approaches “eggs” quickly is also a way to validate some hypothesis before going mainstream.
The second step of overcoming this bias is by understanding the relationship between success and investment of time/money. To ensure that Sunk-Cost Fallacy doesn’t kill your venture, you need to keep evaluating your ideas, goals, milestones, and outcomes in a specific period by establishing relevant KPI (key performance indicators) that will enable to track real progress and adapt, change or pivot.
Confirmation Bias
We seek for all data and stories that reaffirm the need for this new offer. All signs point to YES”
Really all signs? We often look at prepositions the way we want to by focusing on data that support our estimates both qualitative and quantitative and ignore some that are against our position as competitors, time to market, forecast estimates. You can also remember some meetings where your mind was made up before the first word was spoken. The information presented in the meeting was of no use as the decision was already made.
Confirmation bias causes founders, project managers, and product owners to latch onto information that confirms pre-existing beliefs and dismisses negative information. This bias can lead to the death of a venture by causing the founder to ignore critically-important information and fixating on the nuggets that support his project.
We interpret data as we want to see it and make decisions based on that which is a recipe for disaster. We also include our pre-existing beliefs into the mix making things worse. We miss out on important information or supporting data that allows us to make better decisions instead of a biased one.
How to outsmart Confirmation Bias
The best way to steer away from is by having a diversified team that can see problems and solutions from a different angle. You also need to keep an open mind for the team members to come to you and relay the short or long term problem with your plan or decision. You can refer these hiccup guys as the devil’s advocate. They usually come up and tell what may go wrong. They are usually not liked since they go against confirmation bias, but if you have to survive as an entrepreneur or an intrapreneur, this is of the absolute essence.
Kahneman recommends assuming that your hypothesis is wrong since day one and searching for an explanation of why which make us more willing to accept contradictory information.
Optimism Bias
That will never happen to me”
It is good to see the glass as half full but the fact is that it is half full and half empty at the same time. A lot of innovators work on their projects and make their data plus decisions. This leads them to think that nothing can ever go wrong. Well, sorry to burst your bubble but something always does go wrong. This leads to taking excessively risky decisions based on optimism bias. However, this habit pattern has known to hit people with flourishing businesses because their decisions have been correct till far.
How to outsmart Optimism Bias
Since this bias makes you believe that you are less likely to suffer from a bump in the road, the first thing to fix is this thought process. Accept that fact that you are as human as everyone else and bad things can happen to you and your startup even if you have prepared well. Always find loopholes in your system or the weak links. You never know when correcting a small mistake can help you in saving the whole card house from coming down flat on your face, or the floor!
Gary Klein describes a premortem process that operates on the assumption that the “patient” has died, and so asks what did go wrong. The team members’ task is to generate plausible reasons for the project’s failure. This process is explained in detail in his Harvard Business Review‘s article.
Halo Effect
Love at first sight”
This is where the perception of a person rather than an old memory or decision hampers your ability to make the right call. Your overall impression of a person influences how you feel and think about his or her character and then make a move accordingly. An example is a physical attractiveness influencing how you rate someone over other qualities. It is also affected by non-physical qualities and situations like niceness or intelligence.
I recall a story when all of our efforts went down the drain while we made a new project pitch. The program was a new service in the retail segment which would have taken about 12 months to implement. I had presented this project when I was 8-month pregnant, the panel making the decision to work with us declined the collaboration due to technical reasons. However, a customer insider confirmed me later that the reason was my absence for the next months that played a major role. The decision-makers fell in the Halo Effect biased decision-making trap of seeing a pregnant woman presenting a project.
How to outsmart the Halo Effect
The best way to keep the Halo Effect out of the equation is to keep the person with a conflict of interest outside the decision-making circle. He or she can advise but should never be in an authoritative position. If this is the case, the decision will always be based upon individual success rather than organizational glory.
As this is not always possible, another key to managing the Halo effect is that remind that first impression counts and take into account potential Halo effect. In my story, it was clear that a detailed plan of my replacement during maternity leave and the team would have reduced this halo effect.
Anchoring Bias
Most decisions are based on information that you have or receive, however, there is a thin line on how much information is good enough. Deciding on the very first piece of information is a foolish act and has no comparison with deciding on minimum possible info due to lack of time.
This decision based on the first piece of information leads to anchoring bias. Anchoring Bias is the tendency to rely too heavily on the very first piece of information you learn. For example, when you are buying a house you learn that the average price in your targeted sector has a certain value, you will believe that any amount below that is a good deal. You can also think that this figure is a key piece to start a negotiation process as the first number will “anchor” the subsequent deal.
How to outsmart Anchoring Bias
Taking decisions is the trait of market leaders. Moreover, deciding on the first information is never recommended even by market leaders, let alone someone who is just starting.
You need the services of a devil’s advocate again, who can make you delay the decision based on lack of information. This can also be a market expert or external source rather than a company employee who may nod in sync with you because his investment or time is not at stake. Therefore, always wait for the follow-up information and as a rule for your project. You will never know how much information is enough, but you must go out and check other sources, exchange with market experts and be sure you don’t anchor to that first piece of data.
The End Game
Cognitive biases distort our regular judgments, as product managers, entrepreneurs, and innovators. This is also the case when we look out for information that is on the line of own beliefs. If we have multiple paths available, we tend to take the one which again coincides with our pre-defined variables. We often fall victim of tunnel vision and follow one path rather than discovering different solutions for the same set of problems.
One of the most important aspects of critical thinking and analysis is being aware of these cognitive biases and avoiding them when they rush you into taking a biased (usually wrong) decisions. Great innovation and great projects will follow if we recognize and outsmart these biases. We need to analyze every situation as it is and make the right decision based on data rather than historical patterns. If we do not do that, we degrade the decision-making process which degrades the quality of the outcome!
Have you faced any of the cognitive biases discussed in this article?
Share your story in the comment section as it may help someone else in the same situation.
REFERENCES and more
Inspired by Critical Analytical Thinking- Stanford LEAD by Professor Haim Mendelson
24 Cognitive Biases That Are Warping Your Perception of Reality
The Two Friends Who Changed How We Think About How We Think
Intuitive Prediction: Biases and Corrective Procedures
Thinking, Fast and Slow by Daniel Kahneman
Daniel Kahneman: ‘We’re beautiful devices
Performing a Project Premortem
The Anchoring Effect and How it Can Impact Your Negotiation
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