Sunday, June 24, 2018

Do You Let Bias Effect Your Decisions?

Decision making and leadership are not mutually exclusive. Make effective decisions and your team will be motivated and more productive; and the implementation of the decision is more likely to be a success. Yet if you keep making ineffective decisions, eventually you’ll demotivate your team (probably quite quickly), productivity will fall and implementation is less likely to succeed.
For decades, behavioural decision researchers and psychologists have suggested that human beings have two modes of processing information and making decisions. The first, System 1 thinking, is automatic, instinctive, and emotional. It relies on mental shortcuts that generate intuitive answers to problems as they arise. The second, Systems 2 thinking, is slow, logical, and deliberate.
To find out how much you rely on each mode of thinking – intuitive System 1 or more deliberate System 2 – try this cognitive reflection test, below, before reading on (answers at the end of this article).
1 A bat and ball cost $1.10 in total. The bat costs $1.00 more than the ball. How much does the ball cost?
2 If it takes five machines five minutes to make five widgets, how long would it take 100 machines to make 100 widgets?
3 In a pond is a patch of lily pads. Every day, the patch doubles in size. If it takes 48 days for the patch to cover the entire pond, how long would it take for the patch to cover half the pond?
See the answers at the end of the article to see if you were right?
It’s worth noting that each of the two models of thinking has distinctive advantages and disadvantages. In many cases, System 1 takes in information and reaches the correct conclusions nearly effortlessly using intuition and rules of thumb. Of course these shortcuts can lead us astray. So we rely on our methodical System 2 thinking to tell us when our intuition is wrong or our emotions have clouded our judgement, and to correct poor snap judgements. All too often, though, we allow our intuitions or emotions to go unchecked by analysis and deliberation, resulting in poor decisions.
But of course it’s not quite that simple. Psychologists and behavioural economists have identified many cognitive biases that impair our ability to objectively evaluate information, form sound judgements, and make effective decisions. Where an effective leader is aware of their biases and when they may affect their judgement for the worse; and of course where the ineffective leader is often in complete denial of their own biases, refusing to look at themselves in the mirror, instead insisting it’s those around them who need to look in the mirror (as they couldn’t possibly be at fault).
These ineffective leaders, who are in denial about how biases effect their judgement, can be in positions of power for years before they are identified as the problem. This is because they are naturally manipulative and divert the problems on to other people; and where their bosses are also blind to the problems they are causing in their organization.
Below are several biases that can have a negative impact on both our decisions and our employees.
Action-orientated biases include excessive optimism and overconfidence. Where with excessive optimism we are overly optimistic about the outcome of planned actions. We overestimate the likelihood of positive events and underestimate that of negative ones. And with overconfidence we overestimate our skill level relative to others’ and consequently our ability to affect future outcomes. We take credit for past positive outcomes without acknowledging the role of chance.
Biases relating to perceiving and judging alternatives. Where firstly with confirmation bias we place extra value on evidence consistent with a favoured belief and not enough evidence that contradicts it. We fail to search impartially for evidence. Secondly with anchoring and insufficient adjustment we root our decisions in an initial value and fail to sufficiently adjust our thinking away from that value. Thirdly with groupthink we strive for consensus at the cost of a realistic appraisal of alternative courses of action. Finally with egocentrism we focus too narrowly on our own perspective to the point that we can’t imagine how others will be affected by a policy or strategy. We assume that everyone has access to the same information.
Biases related to the framing of alternatives. Where firstly with loss aversion we feel losses more acutely than gains of the same amount, which makes us more risk-averse than a rational calculation would recommend. Secondly with sunk-cost fallacy we pay attention to historical costs that are not recoverable when considering future courses of action. Thirdly escalation of commitment where we invest additional resources in an apparently losing proposition because of the effort, money, and time already invested. Finally controllability bias where we believe we can control outcomes more than is actually the case, causing us to misjudge the riskiness of a course of action.
Stability biases, where with status quo bias we prefer the status quo in the absence of pressure to change it; and present bias where we value immediate rewards very highly and undervalue long-term gains.
Beshears and Gino found that “holding individuals accountable for their judgements and actions increase the likelihood that they will be vigilant about eliminating bias from their decision making. For example, a study of federal government data in the USA on 708 private-sector companies by Alexander Kalev and colleagues found that efforts to reduce bias through diversity training and evaluations were the least effective ways to increase the proportion of women in management. Establishing clear responsibility for diversity (by creating diversity committees and staff positons, for example) was more effective and led to increases in the number of women in management positons.”
Answers to Cognitive Reflection Test:
1 Correct Answer: Five Cents
The intuitive response is to assume that the bat costs $1.00 and the ball costs 10 cents. But if you engaged System 2 and did the math, you’d see that this couldn’t be true. There’s a dollar difference between the two, so the only set of prices that meets all the requirements in the problem is $1.05 for the bat and $0.05 for the ball.
2 Correct Answer: Five Minutes
It’s easy to get this one wrong, because our minds spontaneously pick up a pattern that is misleading. We assume that if five machines make five widgets in five minutes (5-5-5), by analogy 100 machines would make a 100 widgets in 100 minutes (100-100-100). But if you’re using System 2, you see that each machine takes five minutes to make one widget. Think of it this way: if it takes nine women nine months to give birth to nine babies, how long would it take 100 women to birth 100 babies?
3 Correct Answer: 47 Days
If you jumped to the conclusion that half the pond would be covered in half the time (48/2 = 24 days), you neglected to account for exponential growth, a type of reasoning that requires cognitive effort (and, thus, System 2 thinking). The correct answer is 47 days, because if the pond is half covered by then, a doubling over the next (48th) day will result in the pond being entirely covered with lily pads. By the way, ‘one day’ is also a correct, albeit uncommon, response. It takes one day for the lily pads to cover the second half of the pond. If that was your answer, you deserve extra credit for creativity.
Beshears, J. and Gino, F. (2015). Leaders as Decision Architects. Harvard Business Review, May, p.52 – 62.