Overconfidence, anchoring, and choice supportive bias
Part I recap
In Part I of this article, I described how cognitive biases result in our making false assumptions that lead to bad decisions. I discussed the most frequently cited culprit, confirmation bias—i.e., seeking out information that supports our beliefs and dismissing even the most compelling facts that would lead us to question them.
This installment provides an overview of three of the most common sources of bias. –Again, the underlying reason for our so often choosing fiction over fact is simple: We humans prefer an uncomplicated over a complex (and more accurate) map of reality. This is because we can easily be overwhelmed by too much information. In our defense, we have no choice but to filter out most of the information that floods our senses at any given moment. Unfortunately, simplistic, inaccurate, assumptions about social reality, other people, including business issues, are easier on the brain.
Being aware of these sources of cognitive bias can advance your career
As online and other information explodes, employees with critical thinking skills make better decisions. At the same time, they can educate those of higher rank on critical facts otherwise ignored or discounted.
Before making an important decision, ask yourself whether
you’re adversely influenced by any of the following three kinds of bias—
Overconfidence Bias (aka, the Dunning-Kruger Effect)
Some level of confidence is necessary to get out of bed in the morning! However, those who rely on gut-level hunches instead of considering sage advice from well-informed sources are at much greater risk of failure than they realize. –Entrepreneurs are more likely to fall into this category than the general population. We are all are familiar with the stories of heroic entrepreneurs who overcame incredible odds to establish successful enterprises. However, we seldom hear about those who consistently fail.
Conversely, highly skilled individuals are more likely to underestimate their relative competence, assuming incorrectly that others are more capable than they really are. Employees with this characteristic often get frustrated with their coworkers for what they interpret as lack of commitment to task, when, in reality, they are struggling to perform at an acceptable level.
An individual or team that relies too heavily on initial information about an issue will interpret all subsequent data with that ‘anchor’—regardless of whether the newer information is more credible or not. A good example of this is the ‘anchor price’ we see for a product or service. It may, in fact, be an ‘outlier’—, i.e., significantly higher or lower than the median cost.
Choice-Supportive Bias/Endowment Effect
Choice-Supportive Bias reveals why we tend to ascribe positive qualities to what we invest in. Marketers leverage this bias to their advantage, viewing it as ‘building brand loyalty.’ It explains, for example, why people continue to buy the same kind of car for decades regardless of what Consumer Reports may say about it. Bottom line– positive attributes are overestimated, and negative attributes are underestimated.
This bias is parallel to ‘the endowment effect, i.e., placing a higher value on things we own than others do, e.g., an article of clothing, a piece of furniture. So, when you see something on eBay, understand that the owner often has an inflated concept of its value.
In my next and final installment in this Insights series, I’ll focus on ‘social desirability bias’ and ‘irrational escalation.’