How Four Cognitive Biases Deceive Analysts and Destroy Actionability

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How Four Cognitive BiasesDeceive Analysts andDestroy Actionability

A Complimentary Webinar from Aurora WDC12:00 Noon Eastern /// Wednesday 28 September 2016

~ featuring ~

Eric Garland Arik Johnson


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Eric Garland is Executive Director of Competitive Futures, an intelligence consultancy that works with corporations and government agencies around the world on strategic and tactical insights. He’s the author of Future, Inc.: How Businesses Can Anticipate and Profit from What’s NEXT, and How to Predict the Future…and WIN!!!

Company: www.competitivefutures.com

Author: www.ericgarland.co

Twitter: @ericgarland

Email: [email protected]

The Intelligence Collaborative is the online learning and networking community powered by Aurora WDC, our clients, partners andother friends dedicated to exploring how to apply intelligence methods to solve real-world business problems.

Apply for a free 30-day trial membership at http://IntelCollab.com or learn more about Aurora WDC at http://AuroraWDC.com.

Eric Garland

http://www.ericgarland.co


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How Four Cognitive Biases Deceive Analysts and Destroy Actionability

How to use behavioral economics and psychological principles to recognize classic cognitive biases in individuals and organizations before they ruin our decisions

Eric Garland

We have very smart Tools.

Yet Our Decisions Frequently Suck.

Why?


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Stone Age Brain

Tribal Social Hierarchies Complex Realities based on networks and

constant Change

Maybe we should be pleasantly surprised things aren’t dumber.

What is Cognitive Bias?


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A systematic Pattern of deviation From Logical

Norms Due to Tacit Social and Psychological Realities

Important!


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Cognitive Bias is not stupidity.

It occurs in highly intelligent people of significant influence and rank, as well as everyone,

everywhere.


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Social Biases

Memory BiasesDecision Biases

Probability Biases

Where do We Include Cognitive Bias?

Status Quo Bias Sunk Cost Fallacy

Focusing EffectOutcome Bias


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Self-Serving Bias


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Ostrich Effect

Recency Effect Not-Invented-Here

Extreme Performance Bias

Good-ol-Dayism


Notational Bias

Authority Bias Dunning-Kruger


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Social Biases


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The Dunning-Kruger Effect• Definition: The less the person knows about a

subject the more confident they feel about their opinions on it

• Key phrase:

"I know as much as the so-called experts. Healthcare policy is just a matter of common sense."

• Common sufferers: Accomplished people with large egos who think that their expertise carries over to all fields, mediocrities who have never developed expertise and downplay it reflexively, aspiring competitors for the Darwin Awards

• Negative effects: Easily avoidable, catastrophic mistakes


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Status Quo Bias• Definition: Belief that the world is a certain way for a

reason, that it represents statistical normalcy, and is likely to remain in stasis

• Key phrase:

"We're in a recovery and everything is getting back to normal. We've seen recessions like this before in the 80s and 90s. No big deal."

• Common sufferers: Sunny optimists, people terrified by change, winners in the current system

• Negative effects: Inability to improve an organization's position because executives fail to take a situation seriously enough


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Semmelweis Reflex• Definition: Tendency to reject or ignore all new

data if it contradicts existing theory

• Key phrase:

"What do you mean that we surgeons need to wash our hands before operating! Dr. Semmelweis, you're a lunatic!" (True story, hence the name)

• Common sufferers: Practitioners of venerable professions with large bodies of best practice, people who just don't give a damn about preventable infections.

• Negative effects: Significant blindspots in decision making, dead patients


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Probability Biases


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Survivorship Bias• Definition: Tendency to focus on winning strategies,

ignoring fate of losers who tried the same thing. (See Raynor’s The Strategy Paradox)

• Key phrase:

“You know what our secret was? Launching a good website and hiring good people.”

• Common sufferers: People who have never experienced significant setbacks, those who devalue the role of luck and timing

• Negative effects: Inability to assess likelihood of success of future initiatives because we failed to understand what really resulted in success.


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Extreme Performance Bias• Definition: Tendency to ignore statistical regression to

the mean

• Key phrase:

“Housing bubble? Hardly! Yes, asset values are increasing 11% YoY for the first time in history…but it’s the New Normal, Baby!”

• Common sufferers: Ben Bernanke, real estate brokers, sales managers, gamblers on stimulants, derivatives traders (redundant), pension fund managers

• Negative effects: Assumption of unrealistic growth targets, inability to see bubbles, historic financial meltdowns


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Memory Biases


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Good Ol' Days Bias• Definition: Assumption that the past was easier and

more positive than today

• Key phrase:

"It's so scary today. Everything is terrible compared to when I was younger. (when mortgage rates were 14%, unemployment was 8%, violence was 35% higher, and the Russians had nukes trained on us.)”

• Common sufferers: People on the cusp of retirement, people who watch too much cable news, people who suck at history

• Negative effects: Inability to identify positive opportunities for growth because focus is on why the environment is hostile


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Hindsight bias• Definition: Tendency to filter past decisions through current

understanding, assuming greater wisdom and analytical skill

• Key phrase:

"Of course we knew that Dot Com One was a bubble on the verge of popping. Those stock prices made no sense. (Despite the collapse being something few people actually predicted.)”

• Common sufferers: Executives in highly political environments where admitting a mistake is considered weakness

• Negative effects: Insufficient desire to root out current cognitive failures, because old failures are rebranded as understanding


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Decision Biases


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Notational bias• Definition: Tendency of metrics to include more

successes (or false successes) and fewer negative experiences in metrics, therefore skewing our understanding of how effective a decision was

• Key phrase:

"We evaluated ourselves based on internal metrics, and we're doing great. Since this single, cherry-picked number looks OK, clearly our whole strategy is awesome!"

• Common sufferers: "Scientific" managers who trust numbers over intuition, unscrupulous CFOs hoping to hide major business model flaws

• Negative effects: Overconfidence in harmful decisions because "the numbers said it was the right thing to do"


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Short-term benefit bias

• Definition: Tendency to choose quicker, inferior benefit without regard to probability of both outcomes

• Key phrase:

“We just don’t have the money to invest in a green building. We have limited budget and prefer to spend it on wasting electricity and water for 35 years rather than spend a little bit more up front.”

• Common sufferers: Damn near everybody except futurists and their very small number of groupies

• Negative effects: Eventual bankruptcy, slowly collapsing institutions, infrastructure built when oil was $12 a barrel, ecological collapse, general inconvenience


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Want to learn more about how to make more profitable decisions? This deck is from our

new course:

How to Avoid Mind Traps: Improve the Effectiveness of Strategic

Initiatives by Understanding Fifty Years of Getting the Future Wrong

Visit www.competitivefutures.com and contact us for in-person executive retreats and training

sessions.

These can be customized for your organization based on our Future Intelligence training series, used by executives at Global 1000 corporations and government agencies

on four continents.


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http://www.competitivefutures.com


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Email: [email protected]: @ericgarlandFacebook: www.facebook.com/EricGarlandFuture

The Intelligence Collaborative is the online learning and networking community powered by Aurora WDC, our clients, partners andother friends dedicated to exploring how to apply intelligence methods to solve real-world business problems.

Apply for a free 30-day trial membership at http://IntelCollab.com or learn more about Aurora WDC at http://AuroraWDC.com.

Thank you!Now how about a little Q&A?

How Four Cognitive Biases Deceive Analysts and Destroy Actionability

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Transcript of How Four Cognitive Biases Deceive Analysts and Destroy Actionability