Psychologists and behavioral economists have identified dozens of cognitive biases. Here are some of those biases that occur most frequently and that have the largest impact on business and investment decisions.
Action-oriented biases
Interest biases
Pattern-recognition biases
Stability biases
Social biases
Each is explored in more details here:
1. Action-oriented biases: Drive us to take action less thoughtfully than we should.
- Excessive optimism. The tendency for people to be overoptimisticabout the outcome of planned actions, to overestimate the likelihood of positive events, and to underestimate the likelihood of negative ones.
- Overconfidence. Overestimating our skill level relative to others’, leading us to overestimate our ability to affect future outcomes, take credit for past outcomes, and neglect the role of chance.
- Competitor neglect. The tendency to plan without factoring in competi- tive responses, as if one is playing tennis against a wall, not a live opponent.
2. Interest biases: Arise in the presence of conflicting incentives, including nonmonetary and even purely emotional ones.
- Misaligned individual incentives. Incentives for individuals in organizations to adopt views or to seek outcomes favorable to their unit or themselves, at the expense of the overall interest of the company. These self-serving views are often held genuinely, not cynically.
- Inappropriate attachments. Emotional attachment of individuals to people, the business or elements of the business (such as legacy products or brands), creating a misalignment of interests.
- Misaligned perception of corporate goals. Disagreements (often unspoken) about the hierarchy or relative weight of objectives pursued by the organization and about the trade- offs between them.
3. Pattern-recognition biases: Lead us to recognize patterns even where there are none.
- Confirmation bias. The over- weighting of evidence consistent with a favoured belief, underweighting of evidence against a favoured belief, or failure to search impartially for evidence.
- Management by example. Generalizing based on examples that are particularly recent or memorable.
- Champion bias. The tendency to evaluate a plan or proposal based on the track record of the person presenting it, more than on the facts supporting it.
- Power of storytelling. The tendency to remember and to believe more easily a set of facts when they are presented as part of a coherent story.
- False analogies—especially, misleading experiences. Relying on comparisons with situations that are not directly comparable.
4. Stability biases. Create a tendency toward inertia in the presence of uncertainty.
- Anchoring and insufficient adjustment. Rooting oneself to an initial value, leading to insufficient adjustments of subsequent estimates.
- Loss aversion. The tendency to feel losses more acutely than gains of the same amount, making us more risk- averse than a rational calculation would suggest.
- Sunk-cost fallacy. Paying attention to historical costs that are not recoverable when considering future courses of action.
- Status quo bias. Preference for the status quo in the absence of pressure to change it.
5. Social biases Arise from the preference for harmony over conflict.
- Groupthink. Striving for consensus at the cost of a realistic appraisal of alternative courses of action.
- Sunflower management. Tendency for groups to align with the views of their leaders, whether expressed or assumed.
Above is based on an article from McKinsey Quarterly and Olivier Sibony author of the book Noise: A Flaw in Human Judgement - co-authored with Daniel Kahneman and Cass Sunstein
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