Influence of Cognitive Biases on the Managerial Decision Making
Different from the traditional economics, there is extensive assumption of bounded rationality in the aspects of behavioural economics where the decisions cannot be the outcome of rational behaviour thereby resulting in the end products of the cognitive biasness in the process of decision making. Cognitive biases can be understood as the mental behavioural aspects or the cognitions aspects that influence the quality of a decision in an in-depth and significant manner. These biases are can be either inherent or gained from the surrounding. These cognitive biases are the significant aspects of human reasoning at the time of decision making and they are also termed as judgement biases or decision biases in the business world. One way of understanding the role of cognitive biases is as assumed deviations from the logical and rational decision making approach. A rational decision making choice is grounded on the possible consequences of the selection and current assets of the decision maker. There are numerous cognitive biases which have been significantly identified by the researchers in their decision theories. There are specifically discovered a total of 37 cognitive biases in the research and study of D Arnott (1978). There are primarily six broad categories under which all these 37 biases are segregated (Arnott, 2006). The first segregation is based on the memory biasness that is related to the recall or storage of the data and information. The second is the statistical biasness which are related to the common human tendency of processing information oppose to the Probability theory’s normative principles the third segregation is on the basis of confidence biasness that are responsible for increasing the level of confidence of the people in respect with their decision making power. The key aspect of the confidence biasness is the limitation or restriction towards the search for innovative and new information in the process of decision making process. The next is the adjustment biases which make adjustments from the already set positions and there are changes or modification done on the basis of several factors. The fifth biasness is the presentation biases which are primarily related to the way the information is displayed. The way in which the information is processed as well as perceived is another important factor in the presentation based biasness. Such biases are considered as the most influential and vital from the perspectives of decision making. The last segregation is one the basis of situation biases that are the one which takes place in relation to the behavioural aspects of a person when he responds to the usual decision situation and this is considered as the highest level of biasness among all the decision based biases. The paper will explain the significant role of these biases through some examples by focusing on any of the ten cognitive biases pout of all 37 biases (MacLean and Dror, 2016).
(Source: Murata, Nakamura and Karwowski, 2015)
The cognitive biases are the influential factors that not only influences the decision making process but also results in distortion of decision making which results in numerous human errors in the behaviour, decision making and judgements. Eventually such distortions may further result in disasters, collisions, crashes and triggering incidents if there is biasness in the judgement process and decision making (Pettigrew, 2014). There are some particular cognitive biases which will be highlighted that plays a major role in influencing the decision making process and the behavioural aspects of the managers. The first cognitive bias which has a role in distorting the decision making process is the attenuation bias of the situation bases biasness (Tine, 2013). The attenuation bias can be understand as occurrence of biasness when any decision making situation is simplified by discounting or simple ignoring the associated level of uncertainty with the decision making process. This can be well explained through an example of an incident that was the outcome of the attenuation bias or can also be said as normalcy bias which is the result of an extremely normal behaviour (Lunenburg, 2010).
Attenuation Bias
(Source: Murata, Nakamura and Karwowski, 2015)
In this incident, a fire broke out during the incident of cooking with an IH Cooker. The relevancy of presence of cognitive biases can be understand as at the time of cooking, the wife was aware of the consequences of some of the decisions of cooking such taking use less cooking oil, overheating, etc. But she ignored the consequences of such decisions which ultimately resulted in an outbreak of fire. This could be saved from taking place of the cognitive bias wouldn’t have interrupted the decision making process of cooking. In a similar way, there are organisations and the managers take decisions by ignoring the aftermaths of the complexities associated with those decisions. The reason behind ignoring those complexities could be their individual view point of analysing those challenges as normal. But it can lead to resistance from the employees’’ side or any other issue (Murata, Nakamura and Karwowski, 2015). Thus, it is highly essential that such normalcy or attenuation bias must not influence the decision making process (Strutton and Carter, 2013). There are specific issues which occurred because of distortions taking place in decision making due to such bias such as the small problems may convert into a big picture that may hamper the effective and normal functioning of the organisations. There are also issues such as it may result in seizing of the operations, exhaustion of high amount of capital to manage the loss and additional efforts to overcome the danger once it is ignored at the initial phase (Bracha and Brown, 2012).
The second bias which can also influences the decisions and the behaviour of the human while decision making is framing bias. As per this bias, the individuals or the decision makers react to a particular situation in a different manner which depends upon the way it is presented in front of them i.e. either as a loss or a gain. The decision makers tend to avoid risks when there is gain or a positive frame but take utmost risks when there is loss or presentation of a negative frame (Hilbert, 2012).
(Source: Murata, Nakamura and Karwowski, 2015)
In this incident, a flight named KLM Flight 4805 crashed and was considered as an outcome of the influence of the cognitive biases in the process of decision making. In this case, there was a terrorist bomb exploding incident at one of the flower shops in the Las Palmas Airport and because of this incident; the flight which was leaving for Las Palmas Airport was forced to have an emergency landing on the Tenerife Airport. The captain of the plane had a strong reputation for always being extremely punctual in all his flights. And because of this behavioural aspect, the forced landing and additional time consumed presented a negative frame of losing the repo has influenced the pilot and he without taking prior permission, he take off the flight. There was another plane at the runway and the forcible taking off resulted in a crash between both the planes. This decision of the pilot was a result of the negative farming bias. In the managerial decision making also there are many a times when the decisions of the managers get influences by these framing bias and the organisation has to suffer with negative implications of the decisions (Murata, Nakamura and Karwowski, 2015). There are number of issues which are associated with involvement of such biasness in decision making such as when the manager assume or develop a frame for any of the situation in prior then it can significantly impact their decision making behaviour as they tend to have a positive impact on their reputation or in respect with the organisation and thus in order to escape from negative frame or loss, they manipulate their decisions and in such situation there are higher chances of loss and deteriorate results of the decisions taken (Croskerry, Singhal and Mamede, 2013).
Framing Bias
The third bias that causes severe distortions to the decision making processes is confirmation bias. As per this biasness, the decision makers tend to seek confirmation and confirmatory evidences and do not have a consideration towards the disconfirming data or information which is also present and have a vital importance for correct decision making (Gigerenzer and Gaissmaier, 2011).
(Source: Murata, Nakamura and Karwowski, 2015)
In this incident, there is a valid evidence of influence of confirmation bias in the occurrence of the disaster of the Challenger space shuttle. This disaster ahs marked the history with one of the worst space disasters which was a result of a wrong decision making. As the manufacturer of the O-ring has a conscious that it is not safe to launch the Challenger space shuttle in a severe cold temperature but because of the confirmation bias they launched the space shuttle which resulted in a big disaster. The disconfirmation of the manufacturer was changed in the confirmation berceuse of several aspects if the confirmation bias that includes illusion of unanimity, self-censorship and direct pressure upon the dissenters. All these aspects and elements of confirmation bias has forced the manufacturer to agree upon the launch of the Challenger Space Shuttle in spite of knowing the fact that it would be extremely risky to launch it in severe cold temperature. Thus, it crashed and left as a disaster in the history. In a similar way, there are several incidents in the managerial decision making which are the results of confirmation bias in the decision making (Murata, Nakamura and Karwowski, 2015). There are severe issues and challenges for the manager as well as the organisations which are the result of application of confirmation bias in the decision making processes. The issues could be occurrence of clashes among the higher authorities as well as the managers and the employees. Because of taking confirmation from the senior or responsible authorities if decisions are taken without having an in-depth knowledge of ten disconfirmation aspect and there takes place negative outcomes then it can deteriorate the workplace environment. There can also result in imposition of blames and charges on each other for getting free from the responsibility of the negative implications. Thus, the confirmation bias is a giant factor in ruining the workplace environment as well as an element behind the workplace chaos (Fenton?O’Creevy, et al., 2011).
The fourth bias which could be root cause for several wrong decisions in the organisation is overconfidence biasness. This biasness is the result of the ability to solve the novel or the difficult issues is often underestimated. The overconfidence based biasness usually influence the decision makers by challenging their ability or competence to perform any ask. They usually have a sense that they can easily manage a task without any difficulty and in such scenario they tend to make minor mistakes that leads to big disasters (Croskerry, Singhal and Mamede, 2013).
(Source: Murata, Nakamura and Karwowski, 2015)
One of such incidence that took place because of the overconfidence bias is the well-known disaster of the Three Mile Island Nuclear Power Plant where there had taken place a serious nuclear meltdown which resulted in massive destruction. The key reason identified behind the occurrence of the disaster was that the operators forgot to open the secondary water feeding pump valve after the maintenance work as well as they also did not noticed the same fault for a period of time that resulted in a big disaster. There is a presence of over confidence biasness in the decision making where the operators do not agree that they can make such mistakes as well as such error could take place at such a power plant that also have a Emergency Core Cooling System. Because of having a years of experience and positioned at senior and authoritative positions, there was a sense of overconfidence which lead to such cognitive biasness in the decision making process (Murata, Nakamura and Karwowski, 2015). There are severe issues and challenges for the manager as well as the organisations which are the result of presence of overconfidence bias in the decision making processes. The issues could be that the problems or the future risks are not analysed because of the ignorance of the people and taking self-analysed decisions. There is also analysed that because of the overconfidence biasness the managers used to develop an illusion and influence other and the subordinates to agree to the decisions of the managers. Thus, the occurrence of overconfidence biasness in the decision making results in increased number of errors and presence of higher risks for the organisation (Kahneman, Lovallo and Sibony, 2011).
The fifth bias which can also influences the decisions and the behaviour of the human while decision making is selectivity bias. As per this bias, the individuals or the decision makers involves a selectivity factor in their decision making process where they do not consider all the factors rather select as per their self-analysis (Anandarajan and Kleinman, 2011). The selectivity factor is considered as one of the most severe factor that give rise to inequality and inequity in the organisations. The selection biasness can also be considered as selecting a very small sample out of total population which do not include the target audience and thus the results varied and differ. Outcomes gained from such sampling are not adequate and thus the relevancy cannot be judged. Thus, this results in selectivity biasness in decision making on the basis of inadequate selection of samples (Shadlen and Kiani, 2013).
(Source: Jones and Donnelly, 2017)
One of such incidence of selectivity biasness has been identified in the recruitment and selection process of Walmart. It was analysed that more than fifty one percent of the job posts are mainly for the amble candidates rather than the female candidates. And this shows the presence of selectivity biasness in the decision making regarding recruitment of candidates. The HR recruiters show biasness towards the male candidates and prefer hiring them at the authoritative and higher positions in the organisations. There are number of consequences and challenges which the organisations have to face due to selectivity biasness in the decision making. The key issue is that there is wrong decision making use to undue selection of either sample for any research or any candidate. The selectivity biasness ignores the competence and ability of the individuals rather focuses on some of the factors only which are developed as the selection factor from the decision makers. This also leads to loss of talent and inequality in the organisation that also results in deterioration of the environment of the workplace (Del Missier, Mäntylä and Bruin, 2012).
The sixth bias that causes severe distortions to the decision making processes is success bias. As per this biasness, the decision makers tend to develop a tendency that if there is failure because of the decision then it is merely poor luck and when the decisions results in success and organisational growth then it is the ability and competence of the decision makers (Wilcox, 2011). The success biasness comes under the confidence factor of cognitive biasness where the decision members are highly confident in respect with the success of their decisions. Once the decisions of the managers results in higher success and potential outcomes then they tend to develop a sense of biasness that their decisions are perfect in nature and will always give a positive and successful outcome (Jones and Jones, 2010).
One of the most well-known examples of failure of the business due to wrong decision making and presence of success biasness in the process of decision making buy the executives is of Kodak. The company was recognized as the market leader in the photography industry with its vast market share and customer base. But the past successful decisions resulted in a success bias in the decision makers and the organisational leaders. As a result, they continue making decisions on their old and traditional concepts rather than analysing the market trends, competitors’ strategies and dynamic needs of the consumers. Taking decisions on the basis of success bias and old concepts resulted in failure of Kodak and completely out of the market. There are certain specific issues which are the end products of the success bias for the organisations such as there is no certain emphasis upon the various other factors which may lead to failure or negative outcomes. The success biasness by the managers in the decision making develops a sense of aspect in the managers that there decision are always good for the organisation which may lead to loss and weakening of the organisational position in the market as well as also results in less competitive in nature (Fawcett, et al., 2014).
The seventh bias which could be the root cause for several wrong decisions in the organisation is conservatism biasness. This biasness is the result of the conservatism behavioural aspects of the organisational managers. In the conservatism biasness, the estimates are usually not revised in an appropriate manner on the arrival or occurrence of new data. This means that the decision makers work on a similar aspect rather than analysing the current trends and dynamicity of the markets and environment that can impact and give diverse outcomes of the similar decisions taken on a different time frame (Zhong, 2011).
One of the giant example of conservatism biasness on the decision making and its negative implication on the success and sustainability of the organization is of Nokia. The renowned company Nokia had experienced a big failure because of absence of innovativeness and unique technology in its products. The managers and decision makers used to remain conservative and this is because they do not involve in extensive market research and analysis and thus there is no proper forecasting of the risks and opportunities present in the market. Due to working on the only existing data with limited level of inventions, the company lost its market share and this shows an evident case of conservatism biasness in the decision making. The issues that can be the result of conservatism biasness in the organisations could be working on old concepts, restricting oneself from taking advantage of market opportunities, losing competitive edge and reduced market share and customer base (Christensen and Gomila, 2012).
The eighth biasness that causes severe distortions to the decision making processes is complexity. According to this bias, there is developed an assumption in the minds of the decision makers that the complexity usually outperforms simplicity. According to this assumption, the decision makers used to make decisions when the organisational situation become more complex, unsafe and expensive as they assume that a more improved solution will take place (Zhang and Cueto, 2017). There are organisations and the organisational managers that try to figure out the most potential strategise in complex working environment but many a times in creates several issues such as if the managers are not able to find an appropriate strategy or way to resolve the issue then the more complex situation impacts the sustainability of the company as well as its existence. The key reason behind this negative impact is that it becomes extremely impossible to resolve the issues and come out of complex situation at an instant basis (Kahneman, Lovallo and Sibony, 2011). The organisational change management is one of the key examples which explain the presence of complexity bias in decision making. Te managers do not understand the various issues and complexities associated with the organisational change programs. And their ignorance results in high complexity that as there can be strong resistance from employees. Thus, it becomes impossible for the managers to avoid such risks and implement the change program. Thus, to avoid such issues and to have effective and unbiased decision making, it is necessary that the decision must be free from the complexity biasness (Blanchette and Richards, 2010).
The ninth bias which can also influences the decisions and the behaviour of the human while decision making is desire biasness. According to this biasness, there is inaccurate assessment of the probability of the desired results as being greater and improved. It means that the decision making of the managers are also influenced by their own desires for the outcomes rather than the actual results that will be coming. This impacts the decision making process and ultimately there are taken inaccurate decisions by the managers which leads to several negative outcomes (Aharoni, Tihanyi and Connelly, 2011).
In the case of Nestle, Maggi, there was analysed that the noodles were completely banned because of the presence of high amount of lead and Ajinomoto, a taste enhancer. This was the decision of the production department as there was involved a desire biasness of achieving higher sales and increased customer base by fetching the attention of their taste buds by increasing the level of the taste maker which was unhealthy for the health of the consumers. This shows the wrong decisions made by the company in the influences of the desire biasness. There are several issues and challenges which the organisations have to face because of the desire biasness in the decision making. For example, the corporate frauds, the ruining of the brand image, the loss of market share, the attrition of employees and detachment of the customers from the brand are all the results of application of desire biasness sin the decision making process. Thus, the managers must take decisions which re free from desire biases so that there does not have any negative implication of the decisions (Polman, 2012).
The tenth bias which could be root cause for several wrong decisions in the organisation is rule biases. This biasness occurs when the decisions taken b y the managers are based upon the wrong decision rule which is used by them. There are set rules, traditions and policies which are followed by decades in making managerial decisions. But with the increased dynamicity and several other changes, the rules of performing business and making decisions are rapidly changing to meet the current trends and market demands. But there are still number of companies which works upon those set standards of making decisions which many a times results in wrong or inappropriate decision making (Strough, Karns and Schlosnagle, 2011). It can be explained with an example or organisational decision making as earlier the managers and the higher authorities used to take decisions and pass on to employees to follow it which illustrates that there was autocratic leadership. But in present scenario, there are companies which are practicing higher involvement of the employees and the subordinates in the process of decision making by taking their view points and involving them in discussions. This leads to effective decision making by considering diverse notions which can help in working upon the weaker sections of the decisions. This also results in motivation of the employees to retain in the organisations. But the companies that are taking use of autocratic power and are still working upon those set criteria of decision making are suffering from various issues. The key issues comprises of de-motivated employees, higher employee turnover rate, lesser flexibility, formal workplace environment and ineffective assessment of risks (Gudmundsson and Lechner, 2013).
Conclusion
In present scenario, maximum of the managerial and organisational decisions are influenced by the cognitive biases. There are number of cognitive biases which influence the decisions in one or another way and pose a negative factor in the decisions that result in biasness. From this paper, it can be concluded that there are several cases and situations that took place because of the involvement of these biases in decision making of the individuals which leads to several negative outcomes. Thus, it is very much essential that the decisions must be free from any kind of biases and they must be based on true facts and appropriate analysis so that the outcomes attained must be reliable in nature. It can also be stated that the biasness can pose negative implications of the growth, sustainability and success of the organisations as well as can also deteriorate the association among employees, managers and customers. Thus, it is necessary to avoid these biasness to be a part of the decision making process. To improve decision making and avoid occurrence of biasness there must be use various appropriate tools such as Six Thinking Hats, reflect on the history of decision making, fetching appropriate and complete information, Situational Appreciation, cultural intelligence, empathy and many other tools and ways. By taking sue of such approaches, the decisions can be improved and there can be elimination of cognitive biases from the decision making processes (Karelaia and Reb, 2014).
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