The concept of cognitive biases was introduced and popularized by the work of Amos Tversky and Daniel Kahneman since 1972. Biases are seen as systematic errors and flaws that make humans deviate from the standards of rationality, thus making us inept at making good decisions under uncertainty.
That is the conventional definition, let’s see what’s wrong about it and why we want to start from an alternative definition.
Why we got it all wrong about biases?
As highlighted by German psychologist Gerd Gigerenzer in the paper “Heuristic Decision Making,” the term heuristic is of Greek origin, meaning “serving to find out or discover.” More precisely, a heuristic is a fast and accurate way to make decisions in the real world, which is driven by uncertainty.
In my previous article about heuristics, we saw why heuristics can be powerful thinking tools for business people dealing with uncertainty on a daily basis.
When I define heuristics though I’m not using the conventional definition (to be sure that is not the definition given by Kahneman) and we’ll see why that same definition is biased in the first place.
That makes us reconsider the whole thinkingmodelbusiness people, entrepreneurs, managers and all the practitioners out there have been influenced by (count me in).
That is why I decided to analyze the few flaws of the conventional way to look at biases and cognitive errors.
Let’s recap here some of the key points of what heuristics are really about and why those make sense for business people.
Then we’ll go through the core mistakes of the conventional view of biases and cognitive errors at the foundation of behavioral economics and much more.
Then we’ll ask the fundamental question: what’s next?
Context matters
When dealing with real-life scenarios we can relate to them based on the context we live. A Halloween custom wore during a casual Friday won’t look as odd as the same custom wore on a regular day.
Humans think in narrow contexts not because they are narrow-minded but primarily due to the fact that often a successful decision is based on surviving a specific situation.
At the same time, our minds are capable of understanding at a deep level (not logical, neither explainable) the subtleties of the real world, made of hidden costs, risks, and high uncertainty.
In this scenario, things that might seem irrational are not such if looked from a different perspective.
A classic example that gets cited often is about how humans are “loss averse” thus giving much more weight to a loss of $10 say compared to the same $10 gain.
For the modern psychologist, marketer or businessman that might seem irrational and a signal of the human mind’s limitations and stupidity.
However, in real-world scenarios, things are never so clean and clear. Often the problem is hidden, so hidden that being loss averse is just a natural, time-tested defense mechanism against possible screw-ups.
The whole Warren Buffett’s playbook can be summarized: “Rule No. 1: Never lose money. Rule No. 2: Don’t forget rule No. 1”.
The most amateur stock trader knows that losing money is way worse than gaining. If you start from a $100 investment and you lose 50% you end up with $50.
However, to go back to where you were, $100, you will need to gain 100%. In short, a 50% loss will call for a 100% to get back to the initial point.
Polymath Jared Diamond, in his book, The World Until Yesterday, talks about constructive paranoia.
He learned this concept when leaving with several tribes in New Guinea. For instance, those tribes had a cultural norm to avoid sleeping under big trees due to a seemingly irrational fear those might fall.
Indeed, there is a very low probability of that happening. However, if it does there is no way back, you’re dead.
In most real-life scenarios those potential losses carry hidden risks, which as they can’t be computed, are ignored by psychologists, but instead are not hidden to the human mind.
So better be paranoid than a dead smart person. Tribesmen know better while some modern psychologists have forgotten.
What if risk aversion is just a constructive paranoia? This is one of the many examples of how biases could be easily reframed.
A narrow definition of rationality
Modern psychologists have primarily looked at one side of rationality and assumed that’s all that is. This led to the mainstream acceptance of a distorted theory of mind, which focuses on the cognitive errors humans make devoid of any context which has led to an endless list of biases which, we stupid humans fall into.
While it is admirable to move from a psychological framework where humans are infallible to understanding and studying the flaws of our minds.
It is as bad to fall for the opposite thinkingmodel, where the human mind is seen as just an artifact of an ancient time, which only carries errors because it can’t deal anymore with the modern world.
That is why in the last years one of the most used mantras in business, marketing, sales or any endeavor that deals with human behavior has been about “biases and cognitive fallacies” yet as we’ll see those fallacies are mostly rationality in the real world, applied contextually.
The fundamental Kanheman’s error
Scholars like Kahneman and Tversky have changed the way we think about how we think.
In the book “Thinking, Fast and Slow” Kahneman explains his whole career spent in understanding how humans deal with decision-making, especially in relation to uncertainty and whether humans are good “intuitive statisticians.”
As Kahneman’s work would show, people are not good intuitive statisticians, and a two-model thinking system drove our decision-making in the real world.
From these assumptions heuristics produced biases, and those biases, in turn, were systematic errors that made us irrational.
Later on, Kahneman would draw a more balanced view for which judgment and choices aren’t just based on heuristics but also on skills.
Thus, biases would also be the result of the expert overconfidence, or the fact that the more skills you acquire in certain fields the more you become confident about them, thus fall into cognitive biases.
Kahneman’s work has led to infinite lists of human irrationality, humans’ complete inadequacy in having a clear picture of the real world and our inability to deal with logic.
From psychology, straight into economics, decision-making and any other endeavor related to human behavior (marketing, sales, entrepreneurship and more) these have become the dominant thinking models.
Yet this view is extremely narrow and it leads to the opposite excess. Psychologists and practitioners become producers of an infinite list of biases that grow every day to show how irrational we are.
While this production has some literary value, it doesn’t carry any value for the business person trying to make things work in the real world. If at all, that view can be limiting and damaging.
Redefining biases
Some of the fundamental errors are the following:
Out of context: the problem of the currently dominant theories around biases is the focus on the behavioral aspects (how we say we would act in a certain hypothetical scenario or how we act in completely noncontextual scenarios) vs. how we really act in a specific real context.
What is rationality, really? If we define rationality as the ability to follow logical rules, then we are all irrational. If we redefine rationality as the ability to survive specific context-driven situations, then something like risk aversion can be reframed as constructive paranoia. Therefore something that we used to see as a cognitive error, becomes a defense/survival mechanism given the asymmetry of risk-taking and the fact that certain hidden risks can’t be known, or can be known only in hindsight.
Do skills really create biases? Another limited view is the fact that skills cause biases. I think the problem is not of skills but whether in certain domains skills can be acquired at all. In certain areas, think of sports, the more you train, and you do it in a deliberate way, the better you become. In other areas, like entrepreneurship and business in general, building skills is trickier. Each situation and scenario will have its own subtleties and experience (not skils) make us act in certain ways that we can’t even explain. Yet can we call that a skill?
Are biases really biases? By following what’s above you can understand that biases aren’t so if looked through the lenses of a different definition of rationality.
If you agree with all the points above, does it still make sense to keep using this thinkingmodel?
What’s next? Beyond the “bias bias” and into the real-world decision making
Gerd Gigerenzer, in “The Bias Bias in Behavioral Economics” explains how Kahneman’s work has led to the tendency to “spot biases even when there are none.”
As Gigerenzer explained people ” have largely fine-tuned intuitions about chance, frequency, and framing.”
Thus showing little evidence about the fact that biases lead to any cost at all. Therefore, each time you see a bias proposed by psychologists you might want to keep a skeptical eye and trust your fine-tuned intuition, and acquired experience as a business person!
References:
The Bias Bias in Behavioral Economics, Review of Behavioral Economics, 2018, Gerd Gigerenzer
Heuristic Decision Making, Gerd Gigerenzer and Wolfgang Gaissmaier, Annu. Rev. Psychol. 2011. 62:451–82
Judgment Under Uncertainty, Heuristics, and Biases, Amos Tversky and Daniel Kahneman
Thinking, Fast and Slow, by Daniel Kahneman
Risk Savvy: How to Make Good DecisionsBook by Gerd Gigerenzer
Convergent thinking occurs when the solution to a problem can be found by applying established rules and logical reasoning. Whereas divergent thinking is an unstructured problem-solving method where participants are encouraged to develop many innovative ideas or solutions to a given problem. Where convergent thinking might work for larger, mature organizations where divergent thinking is more suited for startups and innovative companies.
Systems thinking is a holistic means of investigating the factors and interactions that could contribute to a potential outcome. It is about thinking non-linearly, and understanding the second-order consequences of actions and input into the system.
Vertical thinking, on the other hand, is a problem-solving approach that favors a selective, analytical, structured, and sequential mindset. The focus of vertical thinking is to arrive at a reasoned, defined solution.
Maslow’s Hammer, otherwise known as the law of the instrument or the Einstellung effect, is a cognitive bias causing an over-reliance on a familiar tool. This can be expressed as the tendency to overuse a known tool (perhaps a hammer) to solve issues that might require a different tool. This problem is persistent in the business world where perhaps known tools or frameworks might be used in the wrong context (like business plans used as planning tools instead of only investors’ pitches).
The Peter Principle was first described by Canadian sociologist Lawrence J. Peter in his 1969 book The Peter Principle. The Peter Principle states that people are continually promoted within an organization until they reach their level of incompetence.
The straw man fallacy describes an argument that misrepresents an opponent’s stance to make rebuttal more convenient. The straw man fallacy is a type of informal logical fallacy, defined as a flaw in the structure of an argument that renders it invalid.
The Streisand Effect is a paradoxical phenomenon where the act of suppressing information to reduce visibility causes it to become more visible. In 2003, Streisand attempted to suppress aerial photographs of her Californian home by suing photographer Kenneth Adelman for an invasion of privacy. Adelman, who Streisand assumed was paparazzi, was instead taking photographs to document and study coastal erosion. In her quest for more privacy, Streisand’s efforts had the opposite effect.
As highlighted by German psychologist Gerd Gigerenzer in the paper “Heuristic Decision Making,” the term heuristic is of Greek origin, meaning “serving to find out or discover.” More precisely, a heuristic is a fast and accurate way to make decisions in the real world, which is driven by uncertainty.
The recognition heuristic is a psychological model of judgment and decision making. It is part of a suite of simple and economical heuristics proposed by psychologists Daniel Goldstein and Gerd Gigerenzer. The recognition heuristic argues that inferences are made about an object based on whether it is recognized or not.
The representativeness heuristic was first described by psychologists Daniel Kahneman and Amos Tversky. The representativeness heuristic judges the probability of an event according to the degree to which that event resembles a broader class. When queried, most will choose the first option because the description of John matches the stereotype we may hold for an archaeologist.
The take-the-best heuristic is a decision-making shortcut that helps an individual choose between several alternatives. The take-the-best (TTB) heuristic decides between two or more alternatives based on a single good attribute, otherwise known as a cue. In the process, less desirable attributes are ignored.
The concept of cognitive biases was introduced and popularized by the work of Amos Tversky and Daniel Kahneman in 1972. Biases are seen as systematic errors and flaws that make humans deviate from the standards of rationality, thus making us inept at making good decisions under uncertainty.
The bundling bias is a cognitive bias in e-commerce where a consumer tends not to use all of the products bought as a group, or bundle. Bundling occurs when individual products or services are sold together as a bundle. Common examples are tickets and experiences. The bundling bias dictates that consumers are less likely to use each item in the bundle. This means that the value of the bundle and indeed the value of each item in the bundle is decreased.
The Barnum Effect is a cognitive bias where individuals believe that generic information – which applies to most people – is specifically tailored for themselves.
First-principles thinking – sometimes called reasoning from first principles – is used to reverse-engineer complex problems and encourage creativity. It involves breaking down problems into basic elements and reassembling them from the ground up. Elon Musk is among the strongest proponents of this way of thinking.
The ladder of inference is a conscious or subconscious thinking process where an individual moves from a fact to a decision or action. The ladder of inference was created by academic Chris Argyris to illustrate how people form and then use mental models to make decisions.
The Six Thinking Hats model was created by psychologist Edward de Bono in 1986, who noted that personality type was a key driver of how people approached problem-solving. For example, optimists view situations differently from pessimists. Analytical individuals may generate ideas that a more emotional person would not, and vice versa.
Second-order thinking is a means of assessing the implications of our decisions by considering future consequences. Second-order thinking is a mental model that considers all future possibilities. It encourages individuals to think outside of the box so that they can prepare for every and eventuality. It also discourages the tendency for individuals to default to the most obvious choice.
Lateral thinking is a business strategy that involves approaching a problem from a different direction. The strategy attempts to remove traditionally formulaic and routine approaches to problem-solving by advocating creative thinking, therefore finding unconventional ways to solve a known problem. This sort of non-linear approach to problem-solving, can at times, create a big impact.
Bounded rationality is a concept attributed to Herbert Simon, an economist and political scientist interested in decision-making and how we make decisions in the real world. In fact, he believed that rather than optimizing (which was the mainstream view in the past decades) humans follow what he called satisficing.
The Dunning-Kruger effect describes a cognitive bias where people with low ability in a task overestimate their ability to perform that task well. Consumers or businesses that do not possess the requisite knowledge make bad decisions. What’s more, knowledge gaps prevent the person or business from seeing their mistakes.
Occam’s Razor states that one should not increase (beyond reason) the number of entities required to explain anything. All things being equal, the simplest solution is often the best one. The principle is attributed to 14th-century English theologian William of Ockham.
The Mandela effect is a phenomenon where a large group of people remembers an event differently from how it occurred. The Mandela effect was first described in relation to Fiona Broome, who believed that former South African President Nelson Mandela died in prison during the 1980s. While Mandela was released from prison in 1990 and died 23 years later, Broome remembered news coverage of his death in prison and even a speech from his widow. Of course, neither event occurred in reality. But Broome was later to discover that she was not the only one with the same recollection of events.
The bandwagon effect tells us that the more a belief or idea has been adopted by more people within a group, the more the individual adoption of that idea might increase within the same group. This is the psychological effect that leads to herd mentality. What in marketing can be associated with social proof.
Gennaro is the creator of FourWeekMBA, which reached about four million business people, comprising C-level executives, investors, analysts, product managers, and aspiring digital entrepreneurs in 2022 alone | He is also Director of Sales for a high-tech scaleup in the AI Industry | In 2012, Gennaro earned an International MBA with emphasis on Corporate Finance and Business Strategy.
