Cognitive Biases Are Bad for Business
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The conventional wisdom in classical economics is that we humans are “rational actors” who, by our nature, make decisions and behave in ways that maximize advantage and utility and minimize risk and costs. This theory has driven economic policy for generations despite daily anecdotal evidence that we are anything but rational, for example, how we invest and what we buy. Economists who embrace this assumption seem to live by the maxim, “If the facts don’t fit the theory, throw out the facts,” attributed, ironically enough, to Albert Einstein.
But any notion that we are, in fact, rational actors, was blown out of the water by Dr. Daniel Kahneman, the winner of the 2002 Nobel Prize for economics, and his late colleague Amos Tversky. Their groundbreaking, if not rather intuitive, findings on cognitive biases, have demonstrated quite unequivocally that humans make decisions and act in ways that are anything but rational.
Cognitive biases can be characterized as the tendency to make decisions and take action based on limited acquisition and/or processing of information or on self-interest, overconfidence, or attachment to past experience.
Cognitive biases can result in perceptual blindness or distortion (seeing things that aren’t really there), illogical interpretation (being nonsensical), inaccurate judgments (being just plain wrong), irrationality (being out of touch with reality), and bad decisions (being dumb). The outcomes of decisions that are influenced by cognitive biases can range from the mundane to the lasting to the catastrophic, for example, buying an unflattering outfit, getting married to the wrong person, and going to war, respectively.
Cognitive biases can be broadly placed in two categories. Information biases include the use of heuristics, or information-processing shortcuts, that produce fast and efficient, though not necessarily accurate, decisions and not paying attention nor adequately thinking through relevant information.
Tags: Cognitive Biases
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