Imagine you’re researching a potential product. You think the market is growing, and as part of your research you find information that supports this belief. As a result, you launch the product, backed by a major marketing campaign, but the product fails. The market hasn’t expanded, so there are fewer customers than you expected. You can’t sell enough of your products to cover their costs, and you end up with a loss.
In this scenario, your decision was affected by confirmation bias.
You interpreted market information in a way that confirmed your preconceptions – instead of seeing it objectively – and you made the wrong decision as a result.
k k Confirmation bias is one of many psychological biases to which
we’re all susceptible when we make decisions. There is now an enor- mous body of thinking about this phenomenon, building on the work of the Nobel Prize – winning psychologist Daniel Kahneman and his late collaborator Amos Tversky.
Psychological bias – also known as cognitive bias – is the ten- dency to make decisions or take actions that go against systematic logic. For example, you might subconsciously make selective use of data, or you might feel pressured to make a decision by power- ful colleagues. Psychological bias is the opposite of clear, measured judgment. It can lead to missed opportunities and poor decision mak- ing. Here are five common psychological biases that can lead us to make poor business decisions.
1. CONFIRMATIONBIAS
As in the earlier example, confirmation bias happens when you sub- consciously look for information that supports your existing beliefs.
This can lead you to make biased decisions because you don’t factor in all relevant information.
To avoid confirmation bias, look for ways to challenge what you think you see. Seek out information from a range of sources, and use an approach such as ORAPAPA (#40) to consider situations from multiple perspectives. Alternatively, discuss your thoughts with oth- ers: Surround yourself with a diverse group of people, and don’t be afraid to listen to dissenting views.
2. ANCHORING
This is the tendency to base your final judgment on information gained early in the decision-making process. For example, when negotiating on price, the initial figure suggested, even if it seems ridiculously high, will often shape the price you end up paying. Think of this as a first impression bias. Once you form an initial picture of a situation, it’s hard to see other possibilities.
To overcome the risk of anchoring affecting your judgment, reflect on your decision-making history, and think about whether you’ve rushed to judgment in the past. Often it is a good idea to ask for more time if you feel pressured to make a quick decision. (If someone is pressing aggressively for a decision, this can be a sign they’re pushing against your best interests.)
k k 3. OVERCONFIDENCEBIAS
This occurs when you place too much faith in your own knowledge and opinions. You may believe that your contribution to a decision is more valuable than it actually is. You might combine this bias with anchoring, meaning that you act on hunches, because you have an unrealistic view of your own decision-making ability.
To overcome this bias, consider the sources of information you tend to rely on when you make decisions: Are they fact-based, or do you rely on hunches? And to what extent are you relying on your prior successes as a source of insight rather than factoring in failures?
If you suspect that you might be depending on potentially unreliable information, try to gather more objective data.
4. GAMBLER’SFALLACY
With the gambler’s fallacy, you expect past events to influence the future. A classic example is a coin toss: If you get heads seven times consecutively, you might assume that there’s a higher chance that you’ll toss tails the eighth time; and the longer the run, the stronger your belief may be that things will change the next time. Of course, the odds are always 50/50.
The gambler’s fallacy can be dangerous in a business envi- ronment. Imagine you’re an investment analyst in a highly volatile market. Your four previous investments did well, and you plan to make a new, much larger one because you see a pattern of success.
In fact, outcomes are highly uncertain, and the number of successes that you’ve had previously has only a small bearing on the future.
To avoid the gambler’s fallacy, make sure that you look at trends from a number of angles. Drill deep into data, and try to develop a realistic view of future odds. If you notice patterns in behavior or product success – for example, if several projects fail unexpect- edly – look for trends in your environment, such as changed customer preferences or wider economic circumstances.
5. FUNDAMENTALATTRIBUTIONERROR
This is the tendency to blame others when things go wrong instead of looking objectively at the situation. In particular, you may blame or judge someone based on a stereotype or a perceived personality flaw.
For example, if you’re in a car accident and the other driver is at fault, you’re more likely to assume that he or she is a bad driver than
k k you are to consider whether bad weather played a role. However, if
youhave a car accident that’s your fault, you’re more likely to blame the brakes or the wet road than your reaction time.
To avoid this error, it’s essential to look at situations, and the people involved in them, nonjudgmentally. Use empathy to under- stand why people behave in the ways they do and build emotional intelligence so that you can reflect accurately on your own behavior.
Note
It’s hard to spot psychological bias in ourselves because it often comes from subconscious thinking. For this reason, it can be unwise to make major decisions on your own, without dis- cussing them with other people.
Learn more about avoiding psychological bias: http://mnd.tools/43
Other Useful Decision-Making Techniques
In addition to the tools recommended in our survey, we believe that you need to use a robust process to make good decisions, and you need to conclude this with a solid go/no-go decision. Find out more about these athttp://mnd.tools/c7c.
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Chapter 8
Foster Creativity and Innovation
As a manager, you are always looking for ways to improve performance – for example, by making your products and services more attractive or by increasing internal efficiency. Many of the tools we discussed in previous chapters help you do this – they are ways of generating continuous improvements within an estab- lished framework. But sometimes you need or have an opportunity to move into uncharted territory – to innovate. This might mean creating a new product or service that hasn’t been seen before, or it might mean trying out radically different ways of working.
This chapter introduces a range of tools that help you with creativ- ity and innovation. For many managers, this is uncomfortable territory because, by definition, innovation means trying something new and accepting the risk that it may not work out. And there is often a feel- ing that innovation is someone else’s job – the R&D department or the business development team.
Our view is that all managers can be creative and innovative and that they need to encourage people in their teams to be so as well.
But we know this isn’t easy. You need to develop strong social and political skills to sell your innovative ideas to others in the organi- zation, a topic we address in Chapters 16 and 17. And you need frameworks and stimuli to help you think outside of the box – to come up with creative ideas that you can then explore in detail. That is what this chapter is all about.
The first two techniques we look at are about trying to see the world through the eyes of your customers rather than assuming you already know what they need. Design thinking (#44)
k k is a very popular way of coming up with business ideas from a
user’s perspective and developing them through a process of rapid prototyping. Ethnography (#45) is a very specific technique, often used as part of design thinking, for tapping into the unarticulated needs of prospective customers.
In addition to gaining inspiration from customers, it is also useful to gain inspiration from the future, and that is where scenario plan- ning (#46) comes in. We also suggest two other techniques – Doblin’s 10 types of innovation (#47), which helps you think broadly about the different forms of innovation open to you, and brainstorming (#48), which is a tried-and-tested way of generating ideas around a particular theme through a group process.