Mistakes in business: How Perceptual Errors Affect Success
In many companies, perception errors often lead to unexpected problems. These planning and control errors are systematic and prevent us from making informed decisions. To recognize and avoid them, we need to be aware of them. In our consulting work, we come across certain patterns again and again.
Distortions are not accidental
Planning deviations do not only result from the unscheduled implementation of decisions made or from the occurrence of unforeseen events. Biases such as overconfidence or unfounded optimism can also lead to mistakes. It is important to understand that bias does not occur randomly. They are not to be confused with random variations in decisions (dispersion).
Think of the bathroom scale in your bathroom, it’s a good way to illustrate the difference. If the scale always indicates either too high or too low a weight, there is a systematic error, a bias. If the weight depends on where you put your feet on the scale, it is a random variation; this is called scatter. (Daniel Kahneman, Andrew M. Rosenfield, Linnea Gandhi, Tom Blaser 2016).
Unconscious perceptual errors
Psychologists and behavioral economists have discovered many cognitive biases that impair our ability to objectively evaluate information, make informed judgments, and make meaningful decisions. A cognitive bias is a cognitive psychology collective term for systematic faulty tendencies in perceiving, remembering, thinking, and judging. They remain mostly unconscious and are based on cognitive heuristics (rules of thumb). There are over 100 cognitive biases, as Rolf Dobelli describes in his book Think Clearly, Act Cleverly (Dobelli 2015).
Types of cognitive distortions
Let’s look at some simple categories that we uncover time and time again in our corporate consulting work.
Overconfidence bias: We are too optimistic about the outcome of planned actions.
Example: A CEO of a company is convinced that the new product line will bring huge success, although the market analysis shows only limited potential. Because of this overconfidence, resources are invested in a risky project that ultimately fails to generate sufficient revenue.
Cognitive biases in perceiving and judging alternatives
Anchoring effect: Decisions are influenced by currently available environmental information, even if it is actually irrelevant. It is therefore an effect in which the judgment is guided by an arbitrary anchor. The result is a systematic bias in the direction of the anchor.
Example: Management has set a price ceiling for a new product. The marketing department decides to price the product just below this ceiling to create a perceived “bargain” atmosphere. As a result, the value of the product may be underestimated and the company fails to recognize the true market value.
Group thinking: We seek consensus while neglecting a realistic assessment of alternative courses of action. The danger of groupthink is its pronounced rigidity and irrationality.
Example: In a board meeting, various approaches to managing a crisis are discussed. Most board members agree to follow a specific strategy to reach a unified consensus. This suppresses alternative ideas or critical voices, and the company may miss out on innovative approaches to solutions.
Confirmation bias: We select information that confirms our own expectations and are not objective in our information search.
Example: A company plans to invest in renewable energies. Decision makers are mainly looking for information that confirms their positive view of renewable energy, neglecting potential risks or problems. This could cause them to overlook important issues and make a less balanced decision.
Cognitive biases in formulating alternatives
Loss aversion: In psychology and economics, it is the tendency to value losses more highly than gains. Loss aversion is a component of the new Prospect Theory, which was established by Kahneman and Tversky in 1979 (Kahneman and Tversky 1979). An important finding of this theory is that individuals behave irrationally in decision-making situations when uncertainty plays a role.
Example: The company is about to enter into a crucial merger that has the potential to significantly increase sales. However, there are also risks and costs involved. Decision makers tend to weigh potential losses more heavily than potential gains. This could lead to an inability to make decisions, even though the merger could be successful in the long term.
Status quo mistake: Most people prefer the status quo to change. In planning, this can mean that decision-makers often remain with the current state as the most convenient and least risky alternative (an obstacle to a culture of innovation).
Example: A company has been established in a particular market for years. Although there are signs of a change in the market environment, the company sticks to proven strategies and neglects potential innovations. As a result, it fails to adapt to new challenges and may lose competitiveness.
These and, of course, other practical biases are confirmed in the relevant literature.
Understand biases and make better decisions
Our goal is to explain the concept of bias as a source of error in more detail and to introduce it to the interested reader. Distortions are often the main cause of problems in companies. Although it is difficult to change the mindsets of stakeholders, we can improve the decision-making environment of our employees. When we are aware of how biases affect us, we can take specific action to get out of this trap. This broadens our perspective and helps us make better decisions.
At TD Trusted Decisions, we support our clients with various tools from our systemic consulting approach to successfully address these challenges.
Decision makers can employ various strategies to protect themselves from the effects of cognitive biases and make more informed decisions.
The first step is to become aware of the existence and impact of cognitive biases. Decision makers should make themselves and their team aware of these biases to better identify them.
Obtain diverse perspectives
Getting opinions and perspectives from different team members or experts can help get a broader view and avoid groupthink.
Structure decision making process
A clearly structured decision-making process with clear criteria and analysis tools can help reduce emotions and subjective influences.
Play through alternative scenarios
Instead of focusing on just one solution, decision-makers should run through various alternatives and scenarios and evaluate their possible consequences.
Ask critical questions
Decision makers should ask critical questions of themselves and others to identify hidden assumptions and possible confirmation bias.
Obtain external advice
Bringing in outside consultants or experts can help reduce blind spots and provide a more objective assessment.
In some cases, it may be useful to pause and reconsider a decision before finally implementing it.
Decision-makers should base their decisions on facts and data, but not suppress intuition or gut feeling.
Careful risk analysis and assessment can help to realistically assess potential losses and counter irrational loss aversion.
Arm yourself against the insidious decision-making stumbling blocks in your business! By consciously addressing cognitive biases, you can take your decision-making process to a new level. Use the many strategies we’ve presented to protect yourself from the influence of these biases and make smarter decisions. Keeping a decision diary can also help you reflect on your own decision-making processes and learn from past experiences.
Together with your team, explore the hidden aspects of your decisions and critically question the assumptions you make. Be bold to include alternative perspectives and appreciate the value of data and facts in your decision-making process.
Together with TD Trusted Decisions GmbH, valuable tools from our systemic consulting approach are at your disposal. Feel free to contact us for further support on your way to a successful decision-making culture.
Valuable insights and practical tips in the podcast
Dive deeper into the topic and listen to interesting interviews on cognitive biases and decision strategies in the podcast shows of Peter Bluhm (Atvisio) and Philipp Wicke, Managing Director of TD Trusted Decisions Hannover GmbH.
Last but not least, we would like to offer you further opportunities for in-depth study: Learn even more about the exciting topic of cognitive biases and their impact on decision-making processes in the corporate world through our recommended reading list.
- Fast thinking, slow thinking; Settlers 2012; Daniel Kahneman
- The Halo Effect: How Managers Let Themselves Be Deceived; Gabal 2008; Phil Rosenzweig
- The art of clear thinking: 52 thinking mistakes you’re better off leaving to others; Hanser 2011; Rolf Dobelli
- “Prospect Theory: An Analysis of Decision under Risk”; In: Econometrica. 47 (2), pp. 263-91.Kahneman, Daniel; Tversky, Amos (1979).
- “Always on target 12/2016”; In: Harvard Business Manager; Daniel Kahneman, Andrew M. Rosenfield, Linnea Gandhi, Tom Blaser (2016).