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    Cognitive Biases

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    oommen
    Cognitive biases refer to mental shortcuts that can prevent rational decision making when assessing risks. Some common biases include confirmation bias, where people focus only on information confirming their beliefs; anchoring bias, where initial information influences decisions disproportionately; and availability bias, where people overestimate risks that are easily recalled. These and other biases like blind spot bias, courtesy bias, and clustering illusion can negatively impact business decisions by causing people to ignore disconfirming data, make socially acceptable decisions over rational ones, and overestimate the importance of small patterns in data. Understanding cognitive biases is important for making objective risk assessments.

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    Cognitive Biases

    Uploaded by

    oommen
    432 views1 page
    Cognitive biases refer to mental shortcuts that can prevent rational decision making when assessing risks. Some common biases include confirmation bias, where people focus only on information confirming their beliefs; anchoring bias, where initial information influences decisions disproportionately; and availability bias, where people overestimate risks that are easily recalled. These and other biases like blind spot bias, courtesy bias, and clustering illusion can negatively impact business decisions by causing people to ignore disconfirming data, make socially acceptable decisions over rational ones, and overestimate the importance of small patterns in data. Understanding cognitive biases is important for making objective risk assessments.

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    Cognitive Biases

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    Cognitive biases refer to mental shortcuts that can prevent rational decision making when assessing risks. Some common biases include confirmation bias, where people focus only on information confirming their beliefs; anchoring bias, where initial information influences decisions disproportionately; and availability bias, where people overestimate risks that are easily recalled. These and other biases like blind spot bias, courtesy bias, and clustering illusion can negatively impact business decisions by causing people to ignore disconfirming data, make socially acceptable decisions over rational ones, and overestimate the importance of small patterns in data. Understanding cognitive biases is important for making objective risk assessments.

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    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
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    432 views1 page

    Cognitive Biases

    Uploaded by

    oommen
    Cognitive biases refer to mental shortcuts that can prevent rational decision making when assessing risks. Some common biases include confirmation bias, where people focus only on information confirming their beliefs; anchoring bias, where initial information influences decisions disproportionately; and availability bias, where people overestimate risks that are easily recalled. These and other biases like blind spot bias, courtesy bias, and clustering illusion can negatively impact business decisions by causing people to ignore disconfirming data, make socially acceptable decisions over rational ones, and overestimate the importance of small patterns in data. Understanding cognitive biases is important for making objective risk assessments.

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    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
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    of 1

    Cognitive bias

    When it comes to assessing risk, humans often fail to make rational decisions
    because our brains take mental shortcuts that prevent us making the correct
    choice. Since the 1960s behavioural scientists and psychologists have been
    researching these failings, and have identified and labelled dozens of them.
    Here are some that can cause havoc when it comes to assessing risks in business

    ORIGIN
    Social Failure to estimate The notion of cognitive biases was first introduced by psychologists Amos Tversky and Daniel
    Kahneman in the early-1970s. Their research paper, ‘Judgment Under Uncertainty: Heuristics and
    Biases’, in the Science journal has provided the basis of almost all current theories of decision-
    Financial Short-termism making and heuristics. Professor Kahneman was awarded a Nobel Prize in 2002 after further
    developing the ideas and applying them to economics.

    BELIEF BIAS
    Basing the strength of an argument
    on the believability or plausibility of
    the conclusion

    “I didn’t quite follow your ANCHORING EFFECT


    CONFIRMATION BIAS
    Relying too much on the initial
    Focusing on information that only argument but the conclusion
    piece of information offered when
    confirms existing preconceptions seems about right” making decisions

    “We did loads of “The first test seemed


    simulations. Most of them BLIND SPOT BIAS OK. Do we need to look
    Viewing oneself as less biased any more?”
    showed there’s no problem”
    than others

    COURTESY BIAS “Let’s ignore Sarah’s AVAILABILITY HEURISTIC


    Giving an opinion/conclusion that is
    views on this one. Overestimating the importance and
    viewed as more socially acceptable so as
    to avoid causing offence/controversy She’s biased” likelihood of events given the greater
    availability of information

    “The last time we discussed CLUSTERING ILLUSION “I saw something very similar
    this the meeting lasted for Erroneously overestimating the to this on LinkedIn. We need
    hours. Let’s move on” importance of small clusters or to take it seriously”
    patterns in large data

    ENDOWMENT EFFECT “This is the second week in a BANDWAGON EFFECT


    Relying too much on the initial row that this has happened. Overestimating the importance and
    piece of information offered when likelihood of events given the greater
    There must be a problem”
    making decisions availability of information

    “I know it will cost a fortune “The whole department


    to fix but it cost us £15,000. knows there’s no
    We can’t just throw it away.” problem here”

    “Dave from tech is worried “Now we’ve got the new


    - but frankly the tech team equipment we can cut the
    are always pessimists” time spent on maintenance”

    STEREOTYPING RISK COMPENSATION


    Assuming a person has characteristics “If it ain’t broke - don’t fix it” Taking bigger risks when perceived
    because they are a member of a group safety increases; being more careful
    when perceived risks increases

    “Our competitors are only STATUS QUO BIAS


    Preferring the current state of affairs
    “Looks like we’ve run out
    doing well because their over change of time to discuss this”
    products are cheap”

    OSTRICH EFFECT
    REACTIVE DEVALUATION “We made a good Avoiding negative financial
    Devaluing an idea because it originated call on that one” information by pretending it
    from an adversary or opponent doesn’t exist

    POST-PURCHASE
    “This worked fine in the RATIONALISATION “The conveyor belt broke three
    factory in the Korea, it Viewing oneself as less biased times last month. It’s pretty
    should work fine here” than others
    unlikely it’ll happen again.”

    ILLUSION OF VALIDITY GAMBLER’S FALLACY


    Overestimating the importance and “Let’s just get the deal Believing that future probabilities are
    likelihood of events given the greater done ASAP” altered by past events, when in fact
    availability of information they are unchanged

    HYPERBOLIC DISCOUNTING
    Preferring a smaller, sooner payoff
    over a larger, later reward

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