Understanding heuristics and cognitive biases and their impact on decision-making

Introduction

In everyday life, making decisions is inevitable, whether it's choosing what to eat for dinner or making more serious business decisions. However, although we like to think that we make the best decisions for ourselves and know why we made a particular decision, we often are not even aware that our decisions are not always the result of completely rational thinking. Additionally, decisions are not made in a vacuum but are always made in an environment that, whether we like it or not, influences our decision-making process.

It is estimated that people make up to 35,000 decisions daily. Complete rationality in making each of these decisions would imply unlimited cognitive abilities, knowledge, and time. Research by psychologists Amos Tversky and Daniel Kahneman from the 1970s showed that people use heuristics or mental shortcuts that simplify decision-making, especially under uncertainty. When we use heuristics, we actually replace a difficult question that we do not have an answer to with an easier question that we know the answer to (Kahneman, 2003) and, satisfied with the answer, continue with our lives. If someone asks you whether there are more workplace injuries among construction workers or library employees, if you do not have accurate data and knowledge about it, you will replace that question with a question about whether you know more construction workers or librarians who have been injured at work. Your answer will depend on how easily you can recall cases of injuries to one or the other. In responding, you actually use the availability heuristic – you make a judgment about the probability of an event depending on how "available" that event is in your memory, i.e., how easily you can recall it.

What are heuristics and cognitive biases?

Mental shortcuts or heuristics have developed in response to the complexity of living and have had an evolutionary role. If you were walking the savannas 10,000 years ago, a noise in the nearby bushes would force you to quickly make a decision whether that noise is dangerous to your life. If the noise is accompanied by growling, your brain decides that it's time to run away, and if what you hear is just a rustle and you feel a gentle breeze on your skin, you conclude that it is just the rustling of leaves and continue your walk. Today we no longer live in savannas, but we still apply heuristics for quick decision-making, and in most cases, they are useful to us. However, incorrect use of mental shortcuts can lead to cognitive biases.

Cognitive biases are systematic, non-random errors in thinking and decision-making. They affect our perception, understanding, and interpretation of information, which can lead to inappropriate or inaccurate conclusions. Cognitive biases are mental errors caused by our simplified strategies for processing information and, as such, affect the way we assess probability, select and evaluate facts, attribute causality, adjust behavior, and make decisions.

Research has shown that there are numerous types of cognitive biases, as shown in the image above, but some of the most commonly mentioned are:

Availability Bias

Describes the human tendency to use information that comes to mind more quickly and easily when making future decisions, or the tendency to overestimate the likelihood of events based on how easily that information is available to us.

If you have recently heard news of a series of robberies in your neighborhood, the availability heuristic can influence your perception of safety. For example, you might overestimate the likelihood of being a robbery victim because the information about these events is fresh and easily accessible in your memory. Even if statistical data show that robberies are rare in your area, the availability heuristic can lead you to overestimate the actual danger because these events were recently highlighted in the media or conversations.

In short, the availability heuristic leads us to believe more in information that is easily accessible or that has been recently highlighted, often overlooking the broader picture or statistical data.

Anchoring Bias

As the word itself suggests, anchoring is a bias that causes us to "anchor," i.e., strongly rely on the first piece of information we hear about something. When planning or evaluating something, we view new information through the lens of that first piece of information instead of seeing it objectively. This can affect our judgment and prevent us from properly updating our plans or predictions.

Suppose you enter an electronics store and see a smart TV marked with a price of 500 euros. That amount becomes an "anchor" - an initial reference point. When thinking about other TVs, you might unintentionally compare them with that initial price of 500 euros.

If you then see another TV marked at 300 euros, that lower amount may seem favorable compared to the initial anchor of 500 euros. However, you may not be fully aware of the real value of the TV or other options on the market. Anchoring affects your decisions so that your valuation often gravitates toward the initial "anchor," even when you would otherwise think differently if you didn't have that initial reference.

Confirmation Bias

The tendency to seek, interpret, or recall information in a way that confirms our existing beliefs or prejudices, and to ignore contrary information.

Suppose you believe that people from a certain country are usually kind and hospitable. When you meet someone from that country who is kind to you, it confirms your existing belief. The confirmation heuristic in this case works by seeking information that confirms what you already believe or expect.

Conversely, if you met someone from that country who behaves rudely, the confirmation heuristic might lead you to dismiss or downplay that information to preserve your belief about the kindness of people from that country.

Framing Effect/Bias

The framing effect is when the way information is presented affects our decisions. The same information can be more or less attractive depending on which features are highlighted.

Suppose we want to convince someone to start exercising. We can use a positive and negative "frame," i.e., we can tell the person that if they exercise regularly, they will improve their health, have more energy, and feel better (positive frame) or we can say if they don't start exercising, they risk health problems, have concentration problems, and lose fitness (negative frame).

In both cases, the goal is to persuade the person to start exercising. However, the way information is presented can affect how the person perceives the decision to exercise. A positive frame can highlight the benefits, while a negative frame can emphasize the potential problems of avoiding exercise. The framing effect highlights how the presentation of information can affect people's motivation and decisions in everyday situations.

Representativeness Bias

This is a mental shortcut we use when assessing the likelihood of an event. When trying to estimate how likely a certain event is, we often make a decision by assessing how similar it is to an existing pattern in our mind.

Suppose we have a person who loves books, classical-style music, has formal education in literature, and often participates in cultural discussions. If we were to use the representativeness heuristic, we might too quickly conclude that this person likely works as a literature professor or in a similar cultural field because their characteristics match our mental prototype of such a profession.

The key point here is that we use similarities between a known person (in this case, a literature professor) and a new person to estimate the likelihood of their profession. However, this assumption can be inaccurate because people with different professions can share similar personal interests or characteristics.

Impact of Cognitive Biases on Decision Making in Organizations

Awareness of cognitive biases and their impact can be crucial for making better decisions in organizations. Here's how cognitive biases can affect everyday decision-making among employees and how understanding these biases can bring benefits:

• Decision Making on New Projects and Innovations: Cognitive biases such as representativeness or confirmation biases can limit creativity and innovation in an organization. If employees don't recognize these biases, they might be inclined to stick to conventional ideas and concepts, missing the opportunity to create new, innovative solutions.

• Teamwork and Collaboration: Biases such as in-group bias or information-seeking bias can affect perception of others and decisions related to collaboration. Understanding these biases can improve teamwork as employees become aware of their prejudices and are more likely to recognize them to better communicate and collaborate with colleagues.

• Decisions on Hiring and Promotion: Anchoring bias can affect decisions on hiring or promotion. If employees are aware of this bias, they can make more effort not to be overly tied to initial impressions and take additional steps in evaluating candidates.

• Achieving Goals and Setting Priorities: Cognitive biases can lead to sub-optimal prioritization and goal setting. Awareness of biases like the availability bias can encourage employees to inform themselves more thoroughly when making decisions and setting goals, resulting in better choices and the correct focus.

• Risk Reduction and Better Management: When employees understand biases like the confirmation bias, they can better recognize situations where they make decisions based on their prejudices and consciously work on a more neutral consideration of all relevant information. This can reduce risk and increase the quality of decisions.

Awareness of cognitive biases is crucial in organizations. Understanding these biases can improve decision-making in projects, foster innovations, enhance teamwork, and optimize hiring and goal-setting processes. Organizations that actively acknowledge and address these biases through employee training can achieve greater efficiency, innovation, and competitive advantages. Awareness of cognitive biases is not only key to better decision-making but also to building successful organizations in a dynamic business environment.

Types of Heuristics and Cognitive Biases