Do You Make the Decisions or is it the Cognitive Bias?

Do you make the decisions or is it the Cognitive Bias?

We all like to think that we are rational human beings and that our decision making is logical and entirely our choice – but is it?

In fact, we are prone to hundreds of proven biases that cause us to think and act irrationally. We have a tendency to make decisions in an illogical way.

Have you ever wondered why we sometimes make poor or bad decisions? What was going on that lead us astray?

The answer, more often than not is Cognitive Bias. These are thought processes that can alter how we perceive reality and get in the way of making good logical decisions.

Do I hear you saying – “but, I know I think rationally, that’s not me?”

Thinking we are rational despite evidence of irrationality in others is known as “blind spot bias”. This is the first bias we need to know about. “Blind-spot bias” is failing to recognise your own cognitive biases, believing that others are more likely to have them than you!
But now you know that, you can move on with an open mind.

Cognitive Bias

Cognitive Bias is the opposite of clear measured judgement. These biases are automatic, controlled by your Automatic System which is associated with the oldest part of your brain, the reptilian brain. The Automatic system is rapid and it feels instinctive. It does not involve what we usually associate with the word ‘thinking’.

The Automatic system is very different from our Reflective system which is more deliberate and self-conscious.

Or as Daniel Kahanerman wrote in his award wining book, this is System 1 and System 2 in action.

Richard Thaler and Case Sunstein in their book “Nudge” explain these two sides by referring to them as two types of agents. ‘Econs’ and Humans.

But my favourite metaphor for understanding these two systems is, are we operating with Homer or Spock?

I cover more about Econs and Humans in my blog on Dynamic Behavioural Marketing. Cognitive Bias is a fundamental part of Dynamic Behavioural Marketing. Click here to read.

Being Predictably Irrational!

People do not always act rationally. In fact they tend to act irrationally, but in a predictable way.

It is because we are Predictably Irrational that experts like Kahnerman and Thaler have been able to prove these biases. Which is great news for us!

When we become aware of these biases, we can then acknowledge and understand their influence on us. This in turn allows us to alter the effect they have on us and use them to our advantage.

Cognitive Biases are integral to the rapidly expanding field of behavioural economics and as Thaler and Sunstein showed in their book “Nudge” can be used to improve decisions about health, wealth and happiness.

The study of why human beings do irrational things lead psychologist Daniel Kahneman to win the Nobel Prize in Economics and to write the brilliant book I mentioned earlier, “Thinking Fast and Slow”

It was back in the 1970’s that Daniel Kahneman, Paul Slovic, and Amos Tversky introduced the concept of cognitive bias and they published their findings in their 1982 book, “Judgment Under Uncertainty.”

Kahneman is at the forefront of the rapidly expanding field of behavioural economics.

Behavioural Economics and Cognitive Bias make up a major and intrinsic part of Dynamic Behavioural Marketing.

Dynamic Behavioural Marketing is the understanding of human behaviour and thinking within the context of the environment fused with behavioural marketing to create a personalised customer experience.

So as you can see Cognitive Bias is at the heart of Dynamic Behavioural Marketing. If you would like to understand why dynamic behavioural marketing is so important to your marketing success please click the Link Here.

Cognitive Biases Why people do what they do.

 Wikipedia Definition of Cognitive Bias
“A cognitive bias refers to the systematic pattern of deviation from norm or rationality in judgment, whereby inferences about other people and situations may be drawn in an illogical fashion. Individuals create their own “subjective social reality” from their perception of the input. An individual's construction of social reality, not the objective input, may dictate their behaviour in the social world. Thus, cognitive biases may sometimes lead to perceptual distortion, inaccurate judgment, illogical interpretation, or what is broadly called irrationality.”

Cognitive Biases….
Automatic deviations from reason
Reality distortion
Often the reason we make bad decisions
They influence our lives daily
in a weird almost spooky way
They affect our choices
Irrationality….

#CognitiveBias – automatic deviations from reason and reality

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Let’s look at a few of theses Cognitive Biases especially ones that are common in business decision making.

Cognitive Bias – Anchoring

People are effected by and overly reliant on the first piece of information they hear, this becomes the basis by which they then make their decision.

Whenever negotiating the first person to offer a price sets the range of possibilities in the other person’s mind.

I remember being advised to never be the first to make the opening offer, a belief held by many. But corroborating research shows the chap or lady that makes the first offer is better off.

You can be influenced in the figure you chose depending on the initial starting point.

Here is an example:
When charities ask for a donation they typically offer a range of donations. These values are not picked at random because the options influence the amount of money people decide to donate.

People will donate more, if the options are $100 $250 $500 $1,000 and $5,000 than if the options are $50 $75 $100 $250 and $500

Cognitive Bias – Availability

People have a tendency to focus on what easily comes to mind, often vidid or recent events. Then give undue weight to those events.

How much should you worry about, hurricanes, flooding, fires or terrorists attacks? Will you get bitten by a shark, if you go swimming in Aussie waters? What's the risk of getting Asian or Bird Flu?

When accessing the probability of these risks and therefore deciding what to do, people assess the risk by how readily examples come to mind.

If people can easily think of relevant examples they will rate the risk higher, be more frightened and concerned than if they can’t.
This is why people buy insurance after a natural disaster, don’t like to fly after any aeroplane crash and restrict their travel after a terrorist attack.

People are even more affected if they have experienced a situation personally, or know someone who has .

Biased assessments of risk can perversely influence how we respond to crisis, business choices and investments.

Cognitive Bias – Overconfidence

Everyone believes they are right and everyone believes they are above average!
90 percent of all drivers believe they are above average. Nearly everyone (including those rarely seen smiling) think they have an above average sense of humour!

People are overly optimistic even when the stakes are high. Being too confident causes people to take greater risks in their daily lives.

Experts are more prone to this bias, probably because they are so convinced they are right.

50% of marriages end in divorce, but at the time of the ceremony almost all believe there is a Zero % chance of them getting divorced.

The same goes for entrepreneurs starting out in business, where the failure rate exceeds 70%. A recent survey asked new start-ups two questions:
What do you think the chances of success for a typical business, starting up, like yours?
What is your chance of success?
The most common answers were for 50% for question one and 90% for the second question, where some even answered 100%

Overconfidence and unrealistic optimism can explain a lot of individual risk taking.

Cognitive Bias – Loss Aversion

People hate losses and they hate losses more than they like gains. Losing something is judged to make you twice as unhappy as gaining something makes you happy.

People are twice as adverse to losing $20 than they are to winning $20.

Loss aversion can induce inertia because of the strong desire to stay as you are. This can have a negative effect especially in business. If you are reluctant to give up what you have because of the fear of incurring losses, then you will turn down opportunities that might have increased your success.

People try to prevent losses more than they try to make gains.

Cognitive Bias – Confirmation

People seek to confirm their preconceptions or beliefs rather than viewing them objectively. They also have a tendency to only listen to information and arguments that agree with their opinion. It is sometimes very hard to get someone to listen to another’s point of view.

People pay more attention to ideas that they have previously agreed with.

People look for information that supports their existing beliefs and often reject or dismiss information that goes against this belief. This bias is like starting with the conclusion and looking for evidence to prove it is true.

Confirmation bias is pervasive as often people struggle to see what is actually happening. This bias goes as far as people distorting information and highlighting only figures or points, that go in support of their beliefs.

Think of situations in school where a student has been labeled as disruptive, you are more likely to pay attention to the times they misbehave than all the times they behave. This is another type of confirmation bias.

Confirmation bias is a potentially disastrous scenario in business where you are basing decisions on biased information whilst not having or accepting all the relevant facts.

Always be willing to challenge what you think and believe, this way you won’t fall for this bias.

Cognitive Bias – Framing

In any kind of decision making context counts, the simple reframing of a question can produce a totally different answer from the same person.

How something is presented, the context in which it is presented – ‘the frame' influences the choices people make and how they process that information.

Often a concept might be presented in such a way as to convey a value judgement either positive or negative and this may not be immediately apparent.

Framing is used to influence the way you think. The use of positive words when dealing with negative situations, for instance. Words influence meaning.

Here are some examples…

Would you feel better hearing from your doctor that after your operation, you have a 90% chance of surviving OR after your operation you have a 10% chance of dying?
Politicians often influence with words. One side praising the government for $1 million spent on the community whilst the opposition is crying out $1 million wasted on the homeless!
Which would you rather buy a beef burger labelled 75% Fat Free or a beef burger labelled 25% Fat? Everyone chooses the Fat Free version.

Consider these 4 Terms
Abortion
Expensive
Cheap
Used
and how do these 3 terms change the feeling and meaning
Pro-Life
Luxurious
Affordable
Pre-owned

Framing can influence your choice and even instigate biases. It can help us to make good and healthy decisions and lead us to make bad decisions.

Choice depends in part to the way in which the problem is stated. Consider the following statement used in energy campaigns hoping to get people to conserve energy.

1. If you use energy conservation you will save $350 per annum
2. If you do not use energy conservation you will lose $350 over annum

Option 2 was way more effective in encouraging energy conservation.

If you can frame your messages so they are congruent and therefore make the information easier to process and easier to understand, then this makes it seem easier to do. In turn, if it seems easier to do more people will take action.

This is one of the main premises behind customer usability and customer experience making the whole customer journey easier and frictionless to complete.

Cognitive Bias – Scarcity

People have a strong scarcity bias. We have evolved to naturally value things that we perceive there is less of.

People unconsciously believe items that are scarce are more valuable and things that are abundant are less valuable.

The scarcity bias impulse frequently kicks in when we are told that a product is in short supply and we might miss a great deal unless we book/pay now!

Low cost airlines are a master in using the scarcity bias as are sites like booking.com. In the image from booking.com I have highlighted in green all the different scarcity pushes they used in just the first 3 options! They are really trying to push that scarcity bias..

With value based pricing of your new products, you want to be thinking about how can you limit them. When they first hit the market can you make the products feel like scarce new things and increase their perceived value?

Cognitive Bias

Even after thousands of years of evolution, deep structure unconscious thoughts, thousands of years old still govern our behaviour. Behavioural economics studies have proven this and given real clarity to how we make decisions.

Cognitive biases are fascinating, they are powerful, manipulative and can take you totally unawares. We all have them.

You make thousands of “rational” decisions every day, from what you eat, to how you run your business, or make a career change.

As you have learnt, from the biases I have shown above, these decisions are often not rational as your brain is hijacked by your Automatic system.

These cognitive biases can stuff up your choice and decision making, leaving you vulnerable. They can affect your behaviour causing a negative impact on your business and life in general. Often preventing you from acting in your own best interests.

The good news, once you know about these biases, you know, and that changes everything.

Once you know you know, and you can’t un-know a known!