Cognitive Biases

Cognitive Biases

1

Seeing Through Biases in Strategic Decisions

Operators in markets are aware that biases affect their choices. Yet few
corporate strategists making important decisions consciously take into account the cognitive biases - systematic tendencies to deviate from rational
expectations.
Unlike in fields such as finance and marketing, where executives can use
psychology tomake the most of the biases residing in others, in strategic
decision making leaders need to recognize their own biases.
Research shows that cognitive biases affect the most important strategic
decisions made by the smartest managers in the best companies. Mergers
routinely fail to deliver the expected synergies. Strategic plans often ignore competitive responses. And large investment projectsare over budget
over time. For every successful market entry, about four fail. Not only
inexperienced startups suffer from this, also sophisticated corporations and
experienced managers.
In a McKinsey Quarterly survey of more than 2,000 executives, only 28%
reported that the quality of strategic decisions in their companies was generally good, 60% thought that bad decisions were about asfrequent as good
ones, and the remaining 12% thought that good decisions were rather infrequent.
When taking a decision, three things usually go with it
• fact gathering and analysis
• insights and judgments
• a process that converts analysis and judgments into a decision
Good analysis into the hands of managers who have good judgment doesn’t
necessarily lead to good decisions. A formal processshould include established practices that de-bias the view of the decision maker. Process is much
more relevant than analysis and is a necessary condition for success.
1

Cognitive biases often wreak havoc on market decisions. For one thing,
when confronted with a difficult decision, most executives rely solely on
an inside view: they focus excessively on the specific case at hand. Thistendency prevents many of them from developing an outside perspective
based on previous market entries and even from evaluating opportunities in
the light of common predictors of success. Furthermore, when an analysis is
conducted, cognitive biases often lead executives to believe that a company’s
skills are more relevant than they really are, that the potential market is
bigger than it actually is,or that rivals won’t respond to the entry...
The Building Blocks of Behavioral Strategy: we are aware about the
presence of a lot of biases and we know how to take measures against them.
If we receive a project from a zealous employee, we should discount its rate
of success to take into account the over-optimism.
However, these corrections are small and limited. The prevalence of biases
incorporate decisions is partly a function of habit, training, executive selection and corporate culture.
Most fundamentally, biases are pervasive because they are a product of human nature - highly resistant to feedback, however brutal.
Improving strategic decision making therefore requires not only trying to
limit our own biases but also orchestrating a decision making process that
willconfront different biases and limit their impact. It is through teamwork
and the process that organizes it that we seek a high quality outcome.

1.1

Pattern-Recognition Biases

The subconscious mind cannot handle information without a clear structure.
As soon as confusing information arrives, the subconscious starts elaborating it trying to find a plausible structure. The process is automatic andwe
are not aware of it: it is a powerful human ability, that of finding hidden
patterns in our reality. Once the patterns are discovered we can learn and
make predictions.

...pattern recognition creates an important evolutionary advantage in humans because “the power of patterns includes the
recognition of environmental and climatic trends, behavioral patterns in predators, prey and...