On Cognitive Bias and Decision Making

"Good judgment comes from experience; experience comes from bad judgment."

We can't eliminate cognitive biases, but we can develop processes to help limit their negative impact. Cognitive biases flow from our humanity, our experience, social, emotional, and political inputs. 

Framing. We make decisions to limit losses, but also in the context of choices presented. To a degree, Henry Kissinger manipulated President Richard Nixon by presenting three options on the Vietnam War - nuclear option, surrender, and the status quo. We can overcome framing by expanding available options and avoiding "either or" mentality. 

Confirmation bias. Confirmation bias occurs when we seek data and opinions that reinforce our position and actively avoid disconfirming information or evidence. Individuals and organizations tend to reproduce themselves. Some college give preference to 'legacy' candidates. We make choices either based on perceived consequences or because that is what "people like us" choose. In the stock market, a thorough evaluation is called considering "the other side of the trade." One analyst mentally tries to "kill the company", assessing growth, debt, capital availability and so forth. 

The Heath brothers in Decisive: How to Make Better Choices in Life and Work suggest asking the question "What would have to be true" for that choice to work. 

Overconfidence. We tend to overvalue our certainty about what occurred or will happen. Wall Street reminds us that "past performance is no guarantee of future results." With good reason, as mean reversion regularly occurs. Executives with recent success and high pay tend to overextend their company with mergers and acquisitions. We can limit overconfidence by asking ourselves to look prospectively and examine what worked or failed. Did the Yankees ask themselves what the back end of the Alex Rodriguez contract would look like? 

Endowment effect. We value what is 'ours' more than what is not. Students given a mug offered to sell it for an average price over seven dollars. Prospective buyers thought it was worth less than three. We cling to our decisions with equal intensity, amplified by confirmation bias and overconfidence. 

Attribution bias. When we succeed, we want the credit. Where we fail, we look to external forces - weather, chance, the performance and decisions of teammates, officiating, et cetera. 

Emotion. Often we are conflicted about decisions because of emotion, including loss aversion. We seldom make the best decision under these conditions. Possible ways to confront these include seeking experts who have faced the decision before and by asking "what would you recommend to a friend in the same situation?"

We improve our decision making by recognizing our susceptibility to biases and making our colleagues aware of them. Where consensus is full, some executives have recommended tabling the discussion, returning at a later time with a fresher viewpoint including alternatives.