Cognitive bias: How thinking distortions influence human action

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Automatisms and shortcuts shape human thinking. And that is a good thing, otherwise the whole day would already have passed before all the simple routine decisions had been made.

However, with all the automatic thought processes, cognitive distortions can also creep in – wrong decisions and impulse-driven actions are the result. But what exactly are cognitive distortions and why should you be aware of them as an entrepreneur?

Cognitive Biases - A short overview

Table of Contents

What are cognitive biases - or: How objective is one's own perception?​

Cognitive biases is a term that originates from cognitive psychology. The word refers to systematically occurring errors in thinking and perception that affect decisions in particular. In this context, systematic means that the errors do not occur randomly. Rather, they result from certain biases in perceiving, remembering, thinking, and judging.

These cognitive biases occur primarily in situations in which a quick and/or intuitive decision is required. The human brain does not have time to examine all available information and therefore relies on certain rules of thumb, also known as heuristics.

An example to make the concept of heuristics more tangible:
You need to go shopping for an Asian dish. Usually you always go to the supermarket around the corner. There you have always gotten all the necessary ingredients. Therefore, this time you also look for the products you need in this grocery store. But not all Asian foods are available there. Your heuristic that you can get everything you need in the supermarket next door has failed. Consequently, you still have to visit a specialized Asian retailer.

When you arrive there, you realize that you could have gotten all the other ingredients here - and at a lower price. If you had questioned your heuristics, you would have saved both time and money. Heuristics thus lead to a behavior that is often goal-oriented. However, this automatism can also lead to wrong decisions, because not all behavioral alternatives are thought through rationally.

10 Cognitive Biases: You should know these common thinking errors

Typical cognitive biases exist that influence human behavior. If you know these thinking errors and certain situations, you can use the knowledge about them to make better decisions in your company.

1. anchoring

Anchoring describes a phenomenon by which many people are unconsciously influenced. A mental anchor serves as a reference to which all subsequent thoughts and decisions are related. This bias is particularly common with numerical values.

An example: A staff member shows up for salary negotiations with a supervisor. The manager opens the conversation and after a while makes an initial wage offer. The employee had actually wanted a larger bonus, but now adjusts his demands to the anchor set by the manager. The consequence: The employee allows himself to be influenced by the predefined anchor value and therefore only demands a smaller wage increase.

2. availability heuristic

The availability heuristic represents another systematic thinking error. Experiences and events that are currently very present in the mind change the perception. The decisive factor is which memories are particularly easily available.

Also closely related to this is the hindsight error. This describes the tendency to overestimate the predictability of an event once it has occurred.

Example: Mr. Schmidt is supposed to fly to a conference abroad. He declines the offer, however, because only two weeks ago he saw a news report about an adoring air accident. Since then, he himself has been plagued by the fear of crashing a plane.

The news report about the accident is very present in his mind and therefore easily available. On the other hand, all air journeys that went off without complications do not receive any attention from the media - Mr. Schmidt completely misjudges the probability of another plane crash on the basis of the availability heuristic.

3. confirmation bias

Individuals always seek out information that reinforces their own assumptions – this phenomenon is described by the confirmation bias. In a nutshell, it is about people wanting to continue believing what they currently believe.

To do this, they select sources and information very specifically so that their own point of view receives further support. All contradictory opinions are automatically overlooked or reinterpreted in such a way that they fit into one’s own worldview.

One example: The management is looking for a new project partner. The company has been working successfully with company X for a long time. Company X therefore has the reputation of being the most reliable and cost-effective contact. Nevertheless, the managers also take a look at the offers from the competition. However, these are either more expensive or simply do not seem to be as competent as Company X. Company X is therefore awarded the contract for the project. This is why company X is awarded the contract for the new project. But was this really the best decision?

An independent examination would have revealed that another company had quoted a higher price, but would have provided significantly more service than Company X. This is not the case. The management simply overlooked this fact due to the confirmation bias in order to subconsciously maintain the belief that company X is the most cost-effective project partner.

4. sunk-cost fallacy: when the point-of-no-return is exceeded.

“We can’t stop this project now, we’ve already invested too much” – this typical thought gets to the heart of the sunk-cost fallacy.

For this cognitive bias is about the fact that the more effort has already been invested in something, the harder it is to abandon it. This can be either time, money, or other expenditures.

For example: Product development wants to bring forth an innovation. For this purpose, the management assembles a large team with various experts. After some hard work, the prototype is ready. But initial application tests show that customers are anything but satisfied with the product. Instead of working together on a new idea, even more work is invested to further optimize the non-wanted item.

As you can see, the sunk-cost fallacy can result in an uneconomical idea continuing to dominate just because too much effort has already gone into the project. In the long run, however, it would make more sense to stop the venture as early as possible and start over.

5. loss aversion

The cognitive bias that can hinder investments the most is loss aversion. This is because it is a psychological phenomenon that states that the pursuit of loss avoidance is greater than the pursuit of gains. The reason is simple: losses matter more harshly and, at first glance, pose a greater threat than low profits.

That bias has a big impact on people’s risk-taking behavior. If a large gain with small losses is in prospect, the behavior is low-risk. If, however, only a small gain with a simultaneous large threat of loss is expected, behavior is more risk-averse.

To give an example: Loss aversion can affect decisions in many ways. This is particularly evident in the stock market. As the profit level of shares increases, the subjective benefit flattens out. This means that an investor is no more happy about a gain of 3,000 euros than about a financial gain of 5,000 euros.

However, the same applies to losses: If you have already lost 1,000 euros, a further 200 euros no longer have much impact. As a result, people settle for gains too soon and hold on to losses for too long.

6. halo effect

The next bias relates to interpersonal judgments. In the halo effect, people conclude on the basis of known, positive characteristics of a person that other (as yet unknown) characteristics must also be positive.

Specifically, this means that if your counterpart seems likeable to you, the probability increases that you will also assume that the person is also intelligent and honest.

An example: Ms. Bayer, the personnel manager, conducts the job interview. The applicant Mr. Jung enters the room well dressed with a confident smile. Mr. Richter, who is rather introverted and shy during the interview, is completely different. Although Mr. Richter has more years of professional experience, Ms. Bayer ultimately chooses Mr. Jung. Due to the halo effect, her decision was unconsciously influenced - in favor of the applicant who seemed more likeable to her.

7. ingroup Bias

The tendency to favor members of one’s own group over outsiders is known as ingroup bias. Due to this cognitive bias, members often devalue the other group – for example, by being seen as incompetent or unsympathetic.

This may have serious consequences for teamwork. For example, silo thinking in the various departments of a company can result. Each group only works for itself and does not want to know anything about “the others”.

Example: In company Z, there is a strict separation of work according to specialist departments. As a result, the departments hardly have anything to do with each other. The marketing group describes itself as a "sworn bunch" - together they have mastered every challenge.

The others in the company, on the other hand, cannot be relied upon - at least if you listen to the voices from the marketing department. In everyday life, there are few points of contact with other work areas, and there is no exchange of knowledge. This shows a clear ingroup bias: only those who belong to the marketing group are considered competent and likeable employees.

8. authority bias

Stanley Milgram impressively demonstrated the authority bias with his experiments on obedience to authority. The result was clear: The opinion of a person who is regarded as an authority or specialist is attributed a higher value.

Here, the actual content of the opinion is not important; the only decisive factor is that a person appears competent and authoritative. In this case, people are more willing to believe a statement in this context.

For example: A new commercial is intended to convince customers of the high quality of the product. An expert appears for this purpose, who comments on the article. This can be, for example, a doctor in a white coat, an elderly professor with glasses, or a female researcher in a laboratory. All these symbols subliminally convey that these are experts who specialize in their field. As a result, customers are more likely to believe the content of the advertising message to be true.

9. Dunning-Kruger-effect

This thinking error describes the fact that ignorance about something usually leads to more self-confidence – at least compared to people with actual knowledge or competence. Weaker performers are therefore at risk of greater self-overestimation according to this cognitive bias. Competent peers, on the other hand, are often underestimated due to this bias.

Here's an example: A business student is lucky and lands a job with management responsibility right after graduation. He only knows what actually happens in the company from his internships, but he is confident that he is up to the challenge.

However, after a few weeks, when the problems in the company start to pile up, an experienced employee speaks up. He has been with the company for 20 years and knows the structures well. However, the new manager rejects his suggestion for solving the problem - after all, he knows best what is good for his company.

10. blind-spot-bias

Now you know about different cognitive distortions. Has your behavior been influenced by them? If your answer is “no”, you may have fallen into the trap of blind-spot bias. This describes a kind of distortion blindness. This means that people have the illusion of being uninfluenced, although they are not.

Unconscious cognitive processes are not always easy to grasp consciously. Therefore, it often seems that a decision has been made quite rationally. Nevertheless, there are various biases involved in the background that influence decision making.

Consequences of cognitive distortions for a company

The variety of cognitive biases makes it clear that they can affect actions in a company in very different ways. This already begins with personnel selection. No matter how trained HR managers are, in the end they too are only human and are subject to unconscious biases. This can result, for example, in certain groups being unconsciously and yet systematically disadvantaged in the application process.

However, cognitive biases also make themselves felt in everyday decisions in a company. Be it in investment decisions or in the choice of a new project partner. Especially in negotiations, various biases often influence the outcome.

Debiasing: counteracting flawed ways of thinking

Here’s the good news: You are not helplessly at the mercy of thinking errors and automatic conclusions. Although they often occur unconsciously, you can consciously counteract them. This principle is also known as debiasing – the removal of a bias.

Your first step to change is quite simple: The more you know about cognitive biases, the easier it is to act against them and to debiase. Because if you think about the biases, you strengthen your so-called metacognition. This describes thinking about thinking. If you take a reflective look at your own thoughts, you are more likely to detect thinking errors. Targeted training on the topic of cognitive distortions is therefore very beneficial for the whole team.

In addition, it requires the willingness to admit mistakes and deceptions. People who always want to be right will continue to follow the same cognitive distortions in the future. People who are open about their own mistakes, on the other hand, learn from them for the future. And the team also benefits from this, so that a general learning effect can occur.

Another measure can limit cognitive distortions such as the sunk-cost fallacy: set a fixed time and financial limit for projects. That way, there is no room for getting bogged down in a hopeless project. If there is no usable result at the end of the project time, the idea is discarded and you start again.

This is how you use cognitive distortions to your own advantage

Cognitive biases, however, are not in themselves a bad thing. They merely describe generally valid tendencies in human thinking and decision-making. Of course, you can also make use of this knowledge for your company.

Your customers’ thinking is also characterized by cognitive distortions. This has an effect on their purchasing decisions, for example. The marketing team can build on this knowledge to optimally adapt advertising. For example, the authority bias can be used to emphasize the high value of a product.

However, you can also use cognitive biases to your advantage in direct contact with customers or partners – for example, in the sense of the halo effect. Make an effort to leave a positive and sympathetic impression. Because, as you know, this can have an influence on how your counterpart perceives you later.

You can also use the anchor heuristic and the loss aversion in negotiations to skillfully negotiate offers. But be careful: Never enter a conversation with the intention of manipulating your counterpart.

Cognitive distortions: Understanding mistaken thought shortcuts

Human cognitive biases are a fundamental building block when it comes to understanding human thinking and decision-making. The brain often resorts to mental shortcuts – so-called heuristics. Although these can lead quickly and efficiently to the goal, they are also more prone to error than well thought-out decisions.

Especially in the case of intuitive and spontaneous actions, people often suffer from cognitive distortions. This can lead, for example, to information being perceived incorrectly, conclusions being drawn quasi-automatically, or prejudices controlling behavior. Nevertheless, these thinking errors do not describe a status quo – because one can consciously counteract them through debiasing. Reflecting on one’s own thoughts is the first step in dissolving the cognitive distortion.

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Manuel Schmidt

Manuel Schmidt

About Me

As a customer insights expert and certified Scrum product owner, I experience the importance of customer-centric product and marketing development on a daily basis.

In combination with agile optimization processes and a corporate culture that is open to experimentation, you will get your growth fully on track.

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