Biases can make or break your business. Which is it?

Strategic thinking is paramount to profitable business decisions, and becoming aware of your biases can help you step up your game.

1. Excessive Optimism

Overestimating the likelihood of positive events and underestimating the likelihood of negative events.

2. Overconfidence

Overestimating our abilities relative to others and our ability to affect future outcomes. Taking credit for positive past outcomes while dismissing chance.

3. Confirmation Bias

Placing extra value on supportive evidence of our belief and too little on evidence that contradicts it. Failing to search impartially for evidence.

4. Anchoring and Insufficient Adjustment

Rooting our decisions in an initial value and failing to adjust our thinking away from that value.

5. Groupthink

Striving for consensus at the expense of a realistic appraisal of alternative courses of action.

6. Egocentrism

Focusing too narrowly on our own perspective and losing the ability to imagine how others will be affected. We assume that everyone has access to the same information we do.

7. Loss Aversion

Feeling losses more than gains and becoming more risk-averse than a rational calculation would recommend.

8. Sunk-Cost Fallacy

Continuing a behavior based on previous investment of resources regardless if current costs outweigh the benefits.

9. Escalation of Commitment

Investing additional resources in a losing proposition because of effort, money, and time already invested.

10. Controllability Bias

Thinking we can control outcomes more than is actually the case causing us to miscalculate risk.

11. Status Quo Bias

Preferring the status quo in the absence of pressure to change it.

12. Present Bias

Valuing immediate rewards very highly and undervaluing long-term gains.

🏁 Conclusion

In a study of entrepreneurs and business leaders, biases helped entrepreneurs take unnecessary risks to move forward, while they hindered business leaders managing large organizations. Take some time to understand them. The more mindful you are, the less they will hinder your decision-making.

References

Beshears, John; Gino, Francesca. (2015). Leaders as Decision Architects. Harvard Business Review.
Busenitz, Lowell; Barney, Jay. (1997). Differences between entrepreneurs and managers in large organizations: Biases and heuristics in strategic decision-making. Journal of Business Venturing.
Ehrlinger, Joyce; Readinger, W.; Kim, Bora. (2016). Decision-Making and Cognitive Biases. Encyclopedia of Mental Health.

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