The human brain is an incredibly sophisticated biological system for continuously processing new information and determining what to do.
But while it generally works amazingly well, our brains are subject to so-called cognitive biases, particularly when presented with new problems and situations.
Decision-making is a key part of business and entrepreneurship and often these decisions involve dealing with novel situations, where cognitive biases are most likely to strike.
In this article, I outline three aspects of human thinking that can cause business leaders to make mistakes.
1) Solving New Problems Based on Past Experience
The human brain continuously tries to map past experiences onto the present. This means that when we are presented with new problems or challenges, our mind immediately asks: “Did I face something similar in the past and, if yes, what did I do then?” or “What do other people do in situations like this?”
The brain is seeking out ‘precedents’, like lawyer examining past legal cases. This type of thinking, which is sometimes referred to as ‘example-based’ or ‘case-based’ thinking, often leads to successful actions in situations that closely match past cases: what worked before will probably work again.
But in new scenarios or in cases that only partly resemble previously encountered problems, precedent-based thinking can cause be a significant source of bias. And thinking we’ve “seen it all before” can lead us to make the wrong decision often with great confidence - not realising that we are fighting the “last war” not dealing with the present conflict.
So when leading a new company, leaders will be all-too-likely to try to replicate what worked at their last company. And when faced with a new crisis (e.g., a sudden drop in sales), they will be likely to reach for strategies that worked last time they had the same problem (sometimes known as “default bias”). But this will not always be appropriate.
To effectively tackle a new problem, however, business leaders need be careful to reflect on the unique aspects of the new situation---being careful not to overgeneralize from past experience. Indeed, a tendency to stick to the “tried and tested” can be a real obstacle to positive change.
2) Creating Narratives
Another thought pattern that can both positively, but also adversely, impact business decision-making is our mind’s tendency to create stories and narratives.
While dealing with any kind of challenge, we all have a natural tendency to create a ‘story arc’ with heroes, villains, and challenges to overcome. But we often don’t notice that our own version of story is not the only possibility, and it may not be the most appropriate.
For instance, when the Covid-19 virus first started spreading across Europe and the U.S., politicians created different narratives to explain what was happening to the public.
Perhaps the pandemic was a “false alarm” that would rapidly fade away; or perhaps it was “like the flu” and could not be halted, but only “managed” as it ran through the population; or perhaps it was a deadly disease that could and should to be stopped by drastic action.
These narratives, of course, shape the decisions that are made: is the main objective to “calm nerves” and avoid an over-reaction; or to slow an inevitably spread so that health services are overwhelmed; or to shut down society until vaccination “comes to the rescue”?
Similarly, business leaders create and use narratives, whether thinking of the pandemic or any other challenge---and the wrong narrative could inadvertently end up biasing their decisions.
They might, for example, start firmly believing a narrative in which they alone can see the right strategy for the company, and need to drive it through, against resistance from others who don’t have their uniquely insight. This may be dangerous if the others turn out to be right.
Subsequently, these narratives might prevent them from identifying evidence of the contrary or lead them to only seek out information that confirms their narratives: the well-known phenomenon of confirmation bias. So, people with different opinions may be rejected as “blockers” (perhaps motivated by some ulterior motive to frustrate progress); or data that seems to contradict the narrative may simply be labelled as unreliable.
Leaders can easily become trapped in their own narratives, rather than flexibly shifting their thinking as new information emerges.
To avoid falling into the traps of our ‘narrative-based’ thought patterns, business leaders can try to reflect on the stories that they tell, and actively consider other possible stories. It is all-too-easy to mistake a story for the incontrovertible truth.
3) The Tendency to Act Too Soon
The third potentially problematic behavioural pattern, which stems from the first two, is a tendency for business leaders do too much, too soon.
For instance, a newly hired CEO might immediately start trying to re-organize a company, re-brand it, introduce new business strategies, hire new employees, or sell/buy some of the company’s subsidiaries or assets.
Instead of evaluating the strengths and weaknesses of the company and then pondering on what is working and what could be improved, business leaders can often make big changes quickly (usually based on what worked for them in the past), hoping for quick positive outcomes, which will then be attributed to their efforts. And even if things go badly, at least no-one can accuse them of not trying! But this leads to a bias to engage in flurries of change, whether useful or not.
Linking back to narrative, many business leaders see their role as that of a guru, who is supposed immediately to know “all the answers.” This is usually not a helpful perspective.
In most cases it is far wiser to take a step back and properly evaluate a situation first, instead of immediately trying to take decisive action. A period of learning about the business challenges, talking with colleagues, and hard thinking, could lead to far more objective analysis and fruitful choices.
The human mind is incredibly successful in dealing with a hugely complex and uncertain world. But the tricks that we use, drawing on experience, and creating narratives can also lead us astray, when we too quickly pick on the wrong precedent, or create an unhelpful story. And we need to guard against the tendency to rush into action, when a more measured and thoughtful approach may be more constructive.
Leadership is hard, and behavioural science certainly doesn’t provide a recipe for success. It can, though, help shape a generation of more reflective and thoughtful leaders.
Nick Chater is Professor of Behavioural Science at Warwick Business School and teaches on The Warwick Executive Diploma in Behavioural Science.
He has over 200 publications, including his most recent book The Language Game: How improvisation created language and changed the world. He has four awards for psychological research and is a fellow of the British Academy and the Cognitive Science Society.
Nick co-presented the BBC Radio 4 show The Human Zoo and serves on the advisory board of the Cabinet Office's Behavioural Insight Team (BIT), popularly know as the 'Nudge Unit'.
He also teaches Behavioural Sciences for the Manager on the Executive MBA, Executive MBA (London), and the Distance Learning MBA. He teaches Judgement and Decision Making on MSc Accounting & Finance, MSc Business & Finance, MSc Finance, and MSc Finance & Economics. He lectures on Big Data Analytics on MSc Global Central Banking and Financial Regulation.
Follow Nick Chater on Twitter @NickJChater.