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Summary.

Cognitive Bias

Outsmart Your Own Biases How to broaden your thinking and make better decisions by Jack B.

Soll, Katherine L. Milkman, and John W. Payne

From the Magazine (May 2015)

Artwork: Millo, 2014, B.ART-Arte in Barriera, Turin, Italy

When making decisions, we all rely too heavily on intuition and use flawed reasoning

sometimes. But it’s possible to fight these pernicious sources of bias by learning to spot them

and using the techniques presented in this article, gleaned from the latest research....

FURTHER READING

Before You Make That Big Decision…

Magazine Article by Daniel Kahneman, Dan Lovallo, and Olivier Sibony

Unearth and neutralize problems in your teams’ thinking.

THIS ARTICLE ALSO APPEARS IN:

Suppose you’re evaluating a job candidate to lead a new office in a

different country. On paper this is by far the most qualified person

you’ve seen. Her responses to your interview questions are flawless. She

has impeccable social skills. Still, something doesn’t feel right. You can’t

put your finger on what—you just have a sense. How do you decide

whether to hire her?

You might trust your intuition, which has guided you well in the past,

and send her on her way. That’s what most executives say they’d do

when we pose this scenario in our classes on managerial decision

making. The problem is, unless you occasionally go against your gut,

you haven’t put your intuition to the test. You can’t really know it’s

helping you make good choices if you’ve never seen what happens when

you ignore it.

It can be dangerous to rely too

heavily on what experts call System

1 thinking—automatic judgments

that stem from associations stored

in memory—instead of logically

working through the information

that’s available. No doubt, System 1

is critical to survival. It’s what

makes you swerve to avoid a car accident. But as the psychologist Daniel

Kahneman has shown, it’s also a common source of bias that can result

in poor decision making, because our intuitions frequently lead us

astray. Other sources of bias involve flawed System 2 thinking—

essentially, deliberate reasoning gone awry. Cognitive limitations or

laziness, for example, might cause people to focus intently on the wrong

things or fail to seek out relevant information.

We are all susceptible to such biases, especially when we’re fatigued,

stressed, or multitasking. Just think of a CEO who’s negotiating a merger

while also under pressure from lawyers to decide on a plant closing and

from colleagues to manage layoffs. In situations like this, we’re far from

decision-ready—we’re mentally, emotionally, and physically spent. We

cope by relying even more heavily on intuitive, System 1 judgments and

less on careful reasoning. Decision making becomes faster and simpler,

but quality often suffers.

Most of us tend to be overconfident in our estimates. It’s important to allow for uncertainty.

One solution is to delegate and to fight bias at the organizational level,

using choice architecture to modify the environment in which decisions

are made. (See “Leaders as Decision Architects,” in this issue.) Much of

the time, though, delegation isn’t appropriate, and it’s all on you, the

manager, to decide. When that’s the case, you can outsmart your own

biases. You start by understanding where they’re coming from:

excessive reliance on intuition, defective reasoning, or both. In this

article, we describe some of the most stubborn biases out there: tunnel

vision about future scenarios, about objectives, and about options. But

awareness alone isn’t enough, as Kahneman, reflecting on his own

experiences, has pointed out. So we also provide strategies for

overcoming biases, gleaned from the latest research on the psychology

of judgment and decision making.

First, though, let’s return to that candidate you’re considering. Perhaps

your misgivings aren’t really about her but about bigger issues you

haven’t yet articulated. What if the business environment in the new

region isn’t as promising as forecast? What if employees have problems

collaborating across borders or coordinating with the main office?

Answers to such questions will shape decisions to scale back or manage

continued growth, depending on how the future unfolds. So you should

think through contingencies now, when deciding whom to hire.

But asking those bigger, tougher questions does not come naturally.

We’re cognitive misers—we don’t like to spend our mental energy

entertaining uncertainties. It’s easier to seek closure, so we do. This

hems in our thinking, leading us to focus on one possible future (in this

case, an office that performs as projected), one objective (hiring someone

who can manage it under those circumstances), and one option in

isolation (the candidate in front of us). When this narrow thinking

weaves a compelling story, System 1 kicks in: Intuition tells us,

prematurely, that we’re ready to decide, and we venture forth with great,

unfounded confidence. To “debias” our decisions, it’s essential to

broaden our perspective on all three fronts.

Thinking About the Future

Nearly everyone thinks too

narrowly about possible outcomes.

Some people make one best guess

and stop there (“If we build this

factory, we will sell 100,000 more

cars a year”). Others at least try to

hedge their bets (“There is an 80%

chance we will sell between 90,000 and 110,000 more cars”).

Unfortunately, most hedging is woefully inadequate. When researchers

asked hundreds of chief financial officers from a variety of industries to

forecast yearly returns for the S&P 500 over a nine-year horizon, their

80% ranges were right only one-third of the time. That’s a terribly low

rate of accuracy for a group of executives with presumably vast

knowledge of the U.S. economy. Projections are even further off the

mark when people assess their own plans, partly because their desire to

succeed skews their interpretation of the data. (As former Goldman

Sachs CFO David Viniar once put it, “The lesson you always learn is that

your definition of extreme is not extreme enough.”)

Because most of us tend to be highly overconfident in our estimates, it’s

important to “nudge” ourselves to allow for risk and uncertainty. The

following methods are especially useful.

Make three estimates.

What will be the price of crude oil in January 2017? How many new

homes will be built in the United States next year? How many memory

chips will your customers order next month? Such forecasts shape

decisions about whether to enter a new market, how many people to

hire, and how many units to produce. To improve your accuracy, work

up at least three estimates—low, medium, and high—instead of just

stating a range. People give wider ranges when they think about their

low and high estimates separately, and coming up with three numbers

prompts you to do that.

Your low and high guesses should be unlikely but still within the realm

of possibility. For example, on the low end, you might say, “There’s a

10% chance that we’ll sell fewer than 10,000 memory chips next

month.” And on the high end, you might foresee a 10% chance that sales

will exceed 50,000. With this approach, you’re less likely to get

blindsided by events at either extreme—and you can plan for them.

(How will you ramp up production if demand is much higher than

anticipated? If it’s lower, how will you deal with excess inventory and

keep the cash flowing?) Chances are, your middle estimate will bring

you closer to reality than a two-number range would.

Think twice.

A related exercise is to make two forecasts and take the average. For

instance, participants in one study made their best guesses about dates

in history, such as the year the cotton gin was invented. Then, asked to

assume that their first answer was wrong, they guessed again. Although

one guess was generally no closer than the other, people could harness

the “wisdom of the inner crowd” by averaging their guesses; this

strategy was more accurate than relying on either estimate alone.

Research also shows that when people think more than once about a

problem, they often come at it with a different perspective, adding

valuable information. So tap your own inner crowd and allow time for

reconsideration: Project an outcome, take a break (sleep on it if you can),

and then come back and project another. Don’t refer to your previous

estimate—you’ll only anchor yourself and limit your ability to achieve

new insights. If you can’t avoid thinking about your previous estimate,

then assume it was wrong and consider reasons that support a different

guess.

Use premortems.

In a postmortem, the task is

typically to understand the cause of

a past failure. In a premortem, you

imagine a future failure and then

explain the cause. This technique,

also called prospective hindsight,

helps you identify potential

problems that ordinary foresight won’t bring to mind. If you’re a

manager at an international retailer, you might say: “Let’s assume it’s

2025, and our Chinese outlets have lost money every year since 2015.

Why has that happened?”

Thinking in this way has several benefits. First, it tempers optimism,

encouraging a more realistic assessment of risk. Second, it helps you

prepare backup plans and exit strategies. Third, it can highlight factors

that will influence success or failure, which may increase your ability to

control the results.

Perhaps Home Depot would have benefited from a premortem before

deciding to enter China. By some accounts, the company was forced to

close up shop there because it learned too late that China isn’t a do-it-

yourself market. Apparently, given how cheap labor is, middle-class

Chinese consumers prefer to contract out their repairs. Imagining low

demand in advance might have led to additional market research

(asking Chinese consumers how they solve their home-repair problems)

and a shift from do-it-yourself products to services.

Take an outside view.

Now let’s say you’re in charge of a new-product development team.

You’ve carefully devised a six-month plan—about which you are very

confident—for initial design, consumer testing, and prototyping. And

you’ve carefully worked out what you’ll need to manage the team

optimally and why you expect to succeed. This is what Dan Lovallo and

Daniel Kahneman call taking an “inside view” of the project, which

typically results in excessive optimism. You need to complement this

perspective with an outside view—one that considers what’s happened

with similar ventures and what advice you’d give someone else if you

weren’t involved in the endeavor. Analysis might show, for instance,

that only 30% of new products in your industry have turned a profit

within five years. Would you advise a colleague or a friend to accept a

70% chance of failure? If not, don’t proceed unless you’ve got evidence

that your chances of success are substantially better than everyone

else’s.

An outside view also prevents the “planning fallacy”—spinning a

narrative of total success and managing for that, even though your odds

of failure are actually pretty high. If you take a cold, hard look at the

costs and the time required to develop new products in your market, you

might see that they far outstrip your optimistic forecast, which in turn

might lead you to change or scrap your plan.

Thinking About Objectives

It’s important to have an expansive mindset about your objectives, too.

This will help you focus when it’s time to pick your most suitable

options. Most people unwittingly limit themselves by allowing only a

subset of worthy goals to guide them, simply because they’re unaware of

the full range of possibilities.

That’s a trap the senior management team at Seagate Technology sought

to avoid in the early 1990s, when the company was the world’s largest

manufacturer of disk drives. After acquiring a number of firms, Seagate

approached the decision analyst Ralph Keeney for help in figuring out

how to integrate them into a single organization. Keeney conducted

individual interviews with 12 of Seagate’s top executives, including the

CEO, to elicit the firm’s goals. By synthesizing their responses, he

identified eight general objectives (such as creating the best software

organization and providing value to customers) and 39 specific ones

(such as developing better product standards and reducing customer

costs). Tellingly, each executive named, on average, only about a third of

the specific objectives, and only one person cited more than half. But

with all the objectives mapped out, senior managers had a more

comprehensive view and a shared framework for deciding which

opportunities to pursue. If they hadn’t systematically reflected on their

goals, some of those prospects might have gone undetected.

Early in the decision-making process, you want to generate many

objectives. Later you can sort out which ones matter most. Seagate, for

example, placed a high priority on improving products because that

would lead to more satisfied customers, more sales, and ultimately

greater profits. Of course, there are other paths to greater profits, such as

developing a leaner, more efficient workforce. Articulating,

documenting, and organizing your goals helps you see those paths

clearly so that you can choose the one that makes the most sense in light

of probable outcomes.

Take these steps to ensure that you’re reaching high—and far—enough

with your objectives.

Seek advice.

Round out your perspective by looking to others for ideas. In one study,

researchers asked MBA students to list all their objectives for an

internship. Most mentioned seven or eight things, such as “improve my

attractiveness for full-time job offers” and “develop my leadership

skills.” Then they were shown a master list of everyone’s objectives and

asked which ones they considered personally relevant. Their own lists

doubled in size as a result—and when participants ranked their goals

afterward, those generated by others scored as high as those they had

come up with themselves.

Outline objectives on your own before seeking advice so that you don’t

get “anchored” by what others say. And don’t anchor your advisers by

leading with what you already believe (“I think our new CFO needs to

have experience with acquisitions—what do you think?”). If you are

making a decision jointly with others, have people list their goals

independently and then combine the lists, as Keeney did at Seagate.

Cycle through your objectives.

Drawing on his consulting work and lab experiments, Keeney has

found that looking at objectives one by one rather than all at once helps

people come up with more alternatives. Seeking a solution that checks

off every single box is too difficult—it paralyzes the decision maker.

So, when considering your goals for,

say, an off-site retreat, tackle one at

a time. If you want people to

exchange lessons from the past

year, develop certain leadership

skills, and deepen their

understanding of strategic

priorities, thinking about these

aims separately can help you

achieve them more effectively. You might envision multiple sessions or

even different events, from having expert facilitators lead brainstorming

sessions to attending a leadership seminar at a top business school.

Next, move on to combinations of objectives. To develop leadership

skills and entertain accompanying family members, you might consider

an Outward Bound–type experience. Even if you don’t initially like an

idea, write it down—it may spark additional ideas that satisfy even more

objectives.

Thinking About Options

Although you need a critical mass of options to make sound decisions,

you also need to find strong contenders—at least two but ideally three to

five. Of course, it’s easy to give in to the tug of System 1 thinking and

generate a false choice to rationalize your intuitively favorite option

(like a parent who asks an energetic toddler, “Would you like one nap or

two today?”). But then you’re just duping yourself. A decision can be no

better than the best option under consideration. Even System 2 thinking

is often too narrow. Analyzing the pros and cons of several options won’t

do you any good if you’ve failed to identify the best ones.

Unfortunately, people rarely consider more than one at a time.

Managers tend to frame decisions as yes-or-no questions instead of

generating alternatives. They might ask, for instance, “Should we

expand our retail furniture business into Brazil?” without questioning

whether expansion is even a good idea and whether Brazil is the best

place to go.

Yes-no framing is just one way we narrow our options. Others include

focusing on one type of solution to a problem (what psychologists call

functional fixedness) and being constrained by our assumptions about

what works and what doesn’t. All these are signs of cognitive rigidity,

which gets amplified when we feel threatened by time pressure,

negative emotions, exhaustion, and other stressors. We devote mental

energy to figuring out how to avoid a loss rather than developing new

possibilities to explore.

Use joint evaluation.

The problem with evaluating options in isolation is that you can’t ensure

the best outcomes. Take this scenario from a well-known study: A

company is looking for a software engineer to write programs in a new

computer language. There are two applicants, recent graduates of the

same esteemed university. One has written 70 programs in the new

language and has a 3.0 (out of 5.0) grade point average. The other has

written 10 programs and has a 4.9 GPA. Who gets the higher offer?

The answer will probably depend on whether you look at both

candidates side by side or just one. In the study, most people who

considered the two programmers at the same time—in joint evaluation

mode—wanted to pay more money to the more prolific recruit, despite

his lower GPA. However, when other groups of people were asked about

only one programmer each, proposed salaries were higher for the one

with the better GPA. It is hard to know whether 70 programs is a lot or a

little when you have no point of comparison. In separate evaluation

mode, people pay attention to what they can easily evaluate—in this

case, academic success—and ignore what they can’t. They make a

decision without considering all the relevant facts.

A proven way to snap into joint evaluation mode is to consider what

you’ll be missing if you make a certain choice. That forces you to search

for other possibilities. In a study at Yale, 75% of respondents said yes

when asked, “Would you buy a copy of an entertaining movie for

$14.99?” But only 55% said yes when explicitly told they could either buy

the movie or keep the money for other purchases. That simple shift to

joint evaluation highlights what economists call the opportunity cost—

what you give up when you pursue something else.

Try the “vanishing options” test.

Once people have a solid option, they usually want to move on, so they

fail to explore alternatives that may be superior. To address this

problem, the decision experts Chip Heath and Dan Heath recommend a

mental trick: Assume you can’t choose any of the options you’re

weighing and ask, “What else could I do?” This question will trigger an

exploration of alternatives. You could use it to open up your thinking

about expanding your furniture business to Brazil: “What if we couldn’t

invest in South America? What else could we do with our resources?”

That might prompt you to consider investing in another region instead,

making improvements in your current location, or giving the online

store a major upgrade. If more than one idea looked promising, you

might split the difference: for instance, test the waters in Brazil by

leasing stores instead of building them, and use the surplus for

improvements at home.

Fighting Motivated Bias

All these cognitive biases—narrow thinking about the future, about

objectives, and about options—are said to be “motivated” when driven

by an intense psychological need, such as a strong emotional

attachment or investment. Motivated biases are especially difficult to

overcome. You know this if you’ve ever poured countless hours and

resources into developing an idea, only to discover months later that

someone has beaten you to it. You should move on, but your desire to

avoid a loss is so great that it distorts your perception of benefits and

risks. And so you feel an overwhelming urge to forge ahead—to prove

that your idea is somehow bigger or better.

Our misguided faith in our own judgment makes matters worse. We’re

overconfident for two reasons: We give the information we do have too

much weight (see the sidebar “How to Prevent Misweighting”). And

because we don’t know what we can’t see, we have trouble imagining

other ways of framing the problem or working toward a solution.

But we can preempt some motivated biases, such as the tendency to

doggedly pursue a course of action we desperately want to take, by using

a “trip wire” to redirect ourselves to a more logical path. That’s what

many expedition guides do when leading clients up Mount Everest:

They announce a deadline in advance. If the group fails to reach the

summit by then, it must head back to camp—and depending on weather

conditions, it may have to give up on the expedition entirely. From a

rational perspective, the months of training and preparation amount to

sunk costs and should be disregarded. When removed from the

situation, nearly everyone would agree that ignoring the turnaround

time would put lives at stake and be too risky. However, loss aversion is

a powerful psychological force. Without a trip wire, many climbers do

push ahead, unwilling to give up their dream of conquering the

mountain. Their tendency to act on emotion is even stronger because

System 2 thinking is incapacitated by low oxygen levels at high

altitudes. As they climb higher, they become less decision-ready—and

in greater need of a trip wire.

In business, trip wires can make people less vulnerable to “present bias”

—the tendency to focus on immediate preferences and ignore long-term

aims and consequences. For instance, if you publicly say when you’ll

seek the coaching that your boss wants you to get (and that you’ve been

putting off even though you know it’s good for you), you’ll be more apt

to follow through. Make your trip wire precise (name a date) so that

you’ll find it harder to disregard later, and share it with people who will

hold you accountable.

Cognitive rigidity gets amplified by time pressure, negative emotions, exhaustion, and other stressors.

Another important use of trip wires is in competitive bidding situations,

where the time and effort already invested in a negotiation may feel like

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