Investors aren’t the only ones who can be affected by cognitive biases, as these can also be found in decisions that business leaders make. The picture below shows the 18 cognitive biases that are found in business out of the 188 different cognitive biases that exist.
The four main categories of cognitive biases found in the business world are: Financial, Social, Short-term and Failure to estimate.
- Financial: With respect to financial biases we tend to make decisions based on more advantageous inputs. For example, using a lower discount rate makes the project look more attractive.
- Social: A social bias exists in a company when certain people’s views can have an impact on decisions and culture. An example would be when an executive wants to do a certain project and everyone agrees in bandwagon fashion.
- Short-term bias: This is running the business for near-term success and not taking the long-term ramification into account.
- Failure to estimate properly: While it is sometimes difficult to forecast too far in the future, running a business requires some projections. An example of this type of bias would be using historical figures as fact or the gambler’s fallacy where if something occurs more in the past that it is less likely to occur in the future.
So now that we know where the pitfalls are, how do we protect against making these same mistakes? Several things you can do to help mitigate the chances of making one of these mistakes are being aware of potential issues, taking a step back, listening and collaborating.
