What You Think You Already May Know About Cognitive Biases...May Be Wrong

What You Think You Already May Know About Cognitive Biases...May Be Wrong For Entrepreneurs, Consultants & Strategists

What is a Cognitive Bias?

A cognitive bias is essentially a mistake in our thought process that can skew the choices and judgments we form. Some of these biases stem from our memories, some are tied to our perceptions, and others are linked to what we focus on in the environment around us.

Unnoticeably, these biases can change our understanding and thinking about the world. They can notably alter our evaluation of risk and uncertainty - two crucial factors when developing a strategy or a concept for a business as an entrepreneur. For entrepreneurs, comprehending these biases can provide a crucial edge.

What does a Cognitive Bias do?

It equips you to make better, more insightful decisions, and formulate more effective strategies for your business.

For instance, you might be susceptible to the 'confirmation bias', where you tend to give more weight to information that aligns with your pre-existing beliefs and discount contradictory information.

By being aware of this, you can consciously diversify your sources of advice and achieve a more balanced and comprehensive perspective when strategizing for your business.

Another prevalent bias among entrepreneurs could be the 'optimism bias', where you might overestimate the chances of success and underestimate the potential risks.

How can we use Cognitive Biases to help with Business Strategy?

By acknowledging this, you can aim to develop strategies that are grounded in reality and consider both potential rewards and risks. Ultimately, understanding and adjusting for cognitive biases can lead to more informed and objective business decisions and strategies.

This knowledge can significantly contribute to your entrepreneurial success.

Cognitive biases can significantly affect an entrepreneur's decision-making process.

What Cognitive Biases should I be aware of as an Entrepreneur or Consultant?

Here are some key cognitive biases to understand for better strategy development for entrepreneurs and consultants:

Confirmation Bias: This is the tendency to seek, interpret, and remember information that confirms our pre-existing beliefs or hypotheses, while giving disproportionately less consideration to alternative possibilities. Entrepreneurs must actively seek diverse viewpoints to counteract this bias.

Overconfidence Bias: This is the propensity to overestimate our abilities and the success of our plans while underestimating the risks. Entrepreneurs should always try to base their decisions on objective data and analysis rather than overconfidence.

Availability Heuristic: This bias causes us to overestimate the importance of information that is readily available or recent. Entrepreneurs should ensure they're considering all relevant data, not just what is immediately accessible or top of mind.

Anchoring Bias: This bias refers to the tendency to rely too heavily on the first piece of information (the "anchor") when making decisions. Entrepreneurs should ensure they take into account a wide range of information before making decisions.

Hindsight Bias: Also known as the "knew-it-all-along" effect, this is the inclination to see past events as predictable. For entrepreneurs, understanding that past success doesn't guarantee future results can help maintain a forward-thinking strategy.

Sunk Cost Fallacy: This refers to the tendency to continue investing in a losing proposition because of what it has already cost. Entrepreneurs need to be able to cut their losses when evidence points towards failure.

How Many Cognitive Biases Do We Know?

There are 188 'known' cognitive biases. This Cognitive Bias Codex Infographic shows all of them together, and categorizes them into 4 groups of biases.

Grab the full image from the creators here via designhacks.co, or view the enlarged image here

What Biases Should You Be Aware of?

Understanding cognitive biases is crucial for consultants and entrepreneurs as these biases can impact decision-making and strategy formulation. Here's how they can be managed to create more effective business strategies:

Confirmation Bias: Consultants and entrepreneurs should ensure they consider multiple perspectives and avoid relying solely on information that confirms their existing beliefs. Using a structured decision-making process and actively seeking contradicting viewpoints can help.

Overconfidence Bias: Overestimating one's skills or the success rate of a project can lead to poor decisions. It's crucial to have an objective assessment of skills and project outcomes to devise realistic strategies. Regularly review and adjust assumptions based on objective feedback and data.

Availability Heuristic: To avoid overestimating the value of readily available information, consultants and entrepreneurs should conduct comprehensive research before making decisions. Look at historical trends, gather data from various sources, and validate assumptions.

Anchoring Bias: Consultants and entrepreneurs need to be aware of the initial information they receive, as it may unduly influence their decisions. It's important to seek additional information to get a balanced view before making any decision.

Hindsight Bias: It's essential to remember that just because a strategy worked in the past, it won't necessarily work again in the future. Businesses should continuously learn, adapt, and evolve their strategies based on current circumstances.

Sunk Cost Fallacy: Avoid sticking with a failing project just because of the time, money, or resources already invested in it. Consultants and entrepreneurs should make future-oriented decisions, and when evidence suggests a project is unlikely to succeed, be ready to move on.

By understanding and acknowledging these cognitive biases, consultants and entrepreneurs can better navigate their decision-making processes, leading to more effective and successful business strategies.

The Rules of Thumb For Your Brain Aren't Always Good Rules

Cognitive biases, the mental shortcuts or 'rules of thumb' we often unconsciously use, can significantly impact the strategic decisions made by consultants and entrepreneurs. Recognising and understanding these biases can help to build more effective, reality-based business strategies.

Ways to Recognise Cognitive Biases:

Self-reflection: Regular introspection and evaluation of your thoughts and decision-making processes can help identify any recurring biases.

Seeking Feedback: Regular feedback from colleagues, mentors, or even through anonymous surveys can help identify biases you might not see.

Education and Training: Learning about different types of cognitive biases can raise your awareness and help you identify when you might be falling into these traps.

Data Analysis: Using data to inform your decisions can help counteract biases. When data contradicts your instincts, it could indicate a bias.

Importance of Recognising Cognitive Biases:

Recognising cognitive biases is crucial because they can lead to flawed reasoning, poor decision making, and ineffective strategies. Understanding these biases can help you make more objective, rational decisions and avoid common pitfalls in your strategic planning.

Potential Consequences of Ignoring Cognitive Biases:

Poor Decision Making: Unrecognized biases can lead to decisions based on flawed assumptions or incomplete information.

Inefficient Use of Resources: Biased decisions can result in wasted time, energy, and resources on strategies that are not effective.

Reduced Objectivity: Failing to recognise these biases can limit your ability to evaluate situations objectively, affecting the quality of your strategies and potentially leading to business failure.

Missed Opportunities: Cognitive biases can cause you to overlook or undervalue potential opportunities.

By recognising and addressing cognitive biases, consultants and entrepreneurs can create more effective, balanced business strategies and make better decisions, leading to improved business outcomes. 

Understanding Your Cognitive Biases for Strategy

Understanding these biases can help entrepreneurs and businesses avoid pitfalls and create more effective, objective strategies. Recognizing and accounting for these biases leads to better decision-making and ultimately, greater success.

What are the top 12 biases related only to how we make decisions in business?

Confirmation Bias: The tendency to favour information that confirms pre-existing beliefs and dismiss information that doesn't. This can cause business leaders to miss vital warning signs or opportunities. A manager might only pay attention to a project's successes while overlooking red flags, reinforcing their belief that the project is a success.

Overconfidence Bias: Overestimating one's abilities and the success of plans, leading to underestimating risks and potential pitfalls. An entrepreneur might believe their startup cannot fail, leading them to overlook market research that indicates a high probability of failure in their industry.

Anchoring Bias: Relying too heavily on the first piece of information obtained (the "anchor") when making decisions. This can result in failing to adequately consider subsequent information. A business owner initially quotes a higher price for their product based on cost of production. When determining the final price, they might be overly influenced by the initial higher price, even if market research suggests a lower price

Availability Heuristic: Overvaluing information that comes to mind quickly. This bias can make us overestimate the probability of similar things happening in the future. After hearing several news stories about cybersecurity breaches, a CEO might overestimate the likelihood of a similar attack on their own company and overspend on cybersecurity measures.

Hindsight Bias: Believing that past events were predictable or obvious after they've occurred, often leading to overconfidence about future predictions. A trader might believe they "knew all along" that a certain stock would rise, leading them to make riskier future investments, thinking they can predict market changes.

Sunk Cost Fallacy: Continuing a project or endeavor simply because of the already invested resources (time, money, effort), even when it's clear it's not beneficial to continue. A company continues to fund a product that isn't selling because they've already invested a lot of money into it, instead of cutting their losses and focusing on more promising products.

Status Quo Bias: The preference for keeping things the same by doing nothing or maintaining one's current or previous decision. This bias can hinder innovation and growth. A business might avoid adopting new technologies or processes due to the comfort of maintaining existing methods, even if change could lead to greater efficiency or competitiveness.

Groupthink: Suppressing opinions and conforming to the perceived majority view in decision-making groups, leading to poor business decisions. An executive team may decide to expand the business because everyone appears to agree, even though some members have private doubts. They don't voice these concerns for fear of breaking consensus.

Escalation of Commitment: The tendency to continue to invest in a failing project due to the cumulative prior investment. This can lead to the continuation of projects that should be abandoned. A business continues to invest in a failing branch or product, believing that more investment will eventually make it profitable, despite evidence to the contrary.

Neglect of Probability: Ignoring probability when making a decision under uncertainty. This can lead to irrational decisions in business strategies. A company doesn't prepare for a potential supply chain disruption, because they feel such disruptions are rare, even though the data shows that the probability is higher than they assume.

Survivorship Bias: Focusing on successful instances due to their visibility while ignoring failed ones. This can result in overly optimistic beliefs because failures are ignored. An entrepreneur might look at only successful companies in a certain sector and try to emulate them, ignoring the numerous failed businesses that tried the same strategies.

Loss Aversion: The tendency to prefer avoiding losses to acquiring equivalent gains. It's better to not lose $5 than to find $5. This can lead to risk-averse behavior and missed business opportunities. A company might avoid investing in a potentially profitable venture due to the fear of losing their initial investment, even though the potential gain is significantly higher than the possible loss.

Ready to Find Out Exactly How Your Cognitive Biases Can Affect Your Ability to Create Your Business Strategy?

How Do You Measure Your Biases, your Strengths, Weaknesses, Opportunities & Threats (SWOT) with Your Strategic Thinking? 

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Take our Strategic Dynamics Assessment tool to be rated against the cognitive biases and see exactly where you stand, and what you can do about it.