Dangers of Biases

Avoid Biases
In some ways you are the biggest danger to developing a successful strategy because you, like everyone else, are full of biases. There are things you want to engage in, emotions you have, ideas you hold to be true that all contribute to the choices you make. The problem is that many, if not most, of these gut reactions won’t lead to the best possible outcomes.

McKinsey points out that “good analysis and good judgment don’t naturally lead to good decisions as the process is also crucial.” In other words, no matter how smart and capable you are, you don’t necessarily make good strategic choices. So you must “Never trust your gut. You need to take your gut feeling as an important data point, but then you have to consciously and deliberately evaluate it.”

Ultimately, your gut is based on emotions, on split-second judgments that “the weighing of emotional tags associated with our memories rather than by conscious weighing of rational pros and cons: we start feeling something–often before we are conscious of having thought anything.” To deal with this you need to develop strategies to rule out strategies rather than simply to confirm them. Warren Buffett does this by hiring an advisor who is against a deal he’s thinking of making. More importantly, he pays that advisor a bonus if they can prevent the deal from happening through their arguments against it.

Use Biases
At the same time as you are avoiding biases, keep in mind that your competitors will tend to have the same set of natural biases. Good strategies work in such a way that your competitors--either because of physical or mental blocks--won’t be able to respond in time to prevent you from increasing your market share. Thus, you can take competitor biases into account when developing your strategy in order to try to create a plan which they will likely be slow to respond to.




List of Biases

Bias Blind Spot
You, I, and everyone else will tend to see ourselves as being less biased than other people, less biased then we actually are. I put this common bias first because as you take the possibility that you might be biased into account, you must realize that you are often less likely to presume that you are biased than you actually are. This is why it’s so important to listen to others and to not only encourage others to challenge you but, at times, to require it. Warren Buffett will sometimes even go so far as to hire people who get a bonus if they convince him not to go through with a deal he thought was a good idea.
Common mistakes exist and are repeated because, as humans, we all rely on a brain which is generally structured in a similar way one to another; a brain which sadly isn’t always perfect. Because of this, an important part of being successful is recognizing what aspects of our thinking are likely to cause these mistakes to come from so that we can avoid them as much as possible.

Anchoring
The tendency to spend too much time focusing or worrying about a single piece of information when making a decision, rather than being able to look at the situation as a whole, is complex. Anchoring occurs because, with dozens of pieces of information out there, it becomes difficult to take everything into account the way we should. So we focus on very few aspects of something to make our decisions. This is one of the big reasons economic gold rushes occur. Because a few aspects of an industry seem to be perfect, we become unable to take into account the more complex information that would tell us that there might be a problem.

While knowledge can be a valuable tool in combating this bias, this bias exists because of our inability to easily keep track of our knowledge. The key to combating this bias then is to be organized, to develop a list of the knowledge which would help us make decisions, and then being organized enough to review those many pieces of information to make the right decision.

Bandwagon Effect
Also known as groupthink, this occurs when people go along with the crowd or do what their boss wants. This is not to say that they will simply give in or don’t have enough of a spine to disagree with what the crowd wants, rather, this is to say that their own beliefs will change to fit those of the group. This is especially dangerous because doing things to encourage people to speak their minds may do nothing to prevent people from thinking what the group has already decided. This is why individual thinking time is important so that people can come to discussions and meetings with some idea of their existing beliefs. This way you are better able to get ideas from many sources rather than a single one.

Confirmation Bias
Rather than trying to discover the truth, humans will subconsciously search for information to confirm what they believe or disprove what they don’t believe. Along with this, any information we take in may automatically be interpreted in such a way that we think that it confirms what we already believe. The backfire effect is similar to this in that it occurs when evidence which proves we are wrong only increases our existing beliefs.
One could argue, then, that our existing beliefs alter how we perceive reality rather than reality altering our existing beliefs. This is why the scientific method involves trying to disprove a hypothesis rather than trying to prove it. I would argue that this idea of trying to prove your idea wrong is an important part of determining which course of action you should take.


Semmelweis Reflex
A reflex which shows that people tend to reject, or not take into account, anything which might contradict their established beliefs and ideas. In some ways this is much more dangerous than the confirmation bias because, while we might attempt to get around our confirmation bias by looking for information to disprove our ideas, we may not always pay attention to the information that we receive. This is one reason why diversity is cited as an important part of developing new and fresh ideas because different views have different natural biases. The danger when planning for diversity is to presume that alternative ideas come from demographic diversity. However, demographics are not an indicator of diversity in thinking; thus, it’s important then to think about psychographic rather than demographic diversity within your organization.


Irrational Escalation
As people invest in a project, they become more and more likely to continue to invest in that project no matter how much evidence comes to light that the project is likely to fail. This occurs in large part because people feel that they have to recover their investment and so hope that by continuing to put money into a poor investment it’ll eventually pay them back.

It’s important to remember that the amount of money you earn from any investment is curtailed by the amount you could have earned had you invested in something else. In other words, if you invest $10,000 in one tactic which will return $13,000 when you could have invested $10,000 in a tactic that would have returned $16,000 then you have lost 3,000 potential dollars. So no amount of previous investment justifies further investment if there is something better you could do with your money. If a project is struggling, you need to reanalyze the resources you need to put into it and compare this to the resources you could put into something else while completely ignoring the amount of previous investment because it is already lost.


Mere Exposure Effect
The more we experience something, the more we’ll like it. So the longer you work on an idea, the more likely you are to like the idea. This is dangerous because it prevents us from actually judging existing thoughts and ideas properly. This is why you need to test the marketing you’ve developed on other people in order to make certain that you don’t just like it because you’ve been looking at it for so long.



Negativity Bias
When people have a negative experience with something, they will tend to give more weight to that experience than they will to positive experiences or statistics. So if a tactic is normally sound, but you’ve had a bad experience with it, you are less likely to try it again regardless of the likelihood of statistical success or changes in the environment. This bias can be especially useful in predicting what your competitors will likely do or how they’ll react as it may be possible to see which of their tactics have failed and so predict that they’ll be slower to respond to similar tactics.


Neglect of Probability
The less certain we are about the outcome of our decisions, or the less information we have with regards to a certain tactic or strategy, the more likely we are to ignore the statistical information we do have. So when something seems to be uncertain, we tend to be more susceptible to our natural biases.


Normalcy Bias
People tend to focus only on what their experience has shown them is likely to happen and so won’t plan for disasters which haven’t happened. This, for example, is one reason why people have tended to underestimate the impact of some of the major disasters we’ve had recently. It’s also why many businesses underestimated the impact which the recession, changes in technology, gas prices, and globalization would have on their business.



Planning Fallacy
We tend to think that it will take less time to do something than it actually will; thus, we should always try to plan for things to take substantially longer than we think they will in order to mitigate this effect.


Status Quo Bias
Many people don’t like change. Once they’ve established a rhythm, they want it to continue on forever. This is why so many strategies remain rigid even as the world changes around them depleting their resources. Perhaps the biggest danger of the status quo bias occurs when what was the status quo was in fact the best situation for a business, yet the world has changed around the business so that the status quo they once knew no longer exists.

Take, for example, the book industry which reached a near perfect balance for large retailers, publishers, and distributors that allowed them to continually grow and earn profit while keeping smaller competitors from entering the market. Then everything changed in such a way that they stand to lose money. Rather than realizing that many of the loses are inevitable and trying to find a way to deal with them, however, most businesses have refused to accept the changes and have so failed.

You must understand that the world, the status quo, will change and many if not most of these changes will destroy much of the money you used to make. In order to survive, you can’t pretend that the status quo isn’t changing. You can’t pretend that globalization, recessions, bubbles, technology, etc. don’t exist because they do. I have repeated this throughout this book, but it bears repeating. You must adapt your strategy to the reality that exists or that you can actually change. Yes, sometimes the reality is that you are going to earn less money in a specific industry or with a specific niche than you used to which is why you must also be able to find new sources of revenue.

Think, for example, about Apple, a computer company which now earns billions of dollars on music, or Disney, a movie company who now earns more on theme parks than they do on their movies which has allowed it to survive while most entertainment companies have been bought out by someone else.


Ambiguity Effect
When people avoid doing something new or something because they feel they don’t have all the information for it, they have fallen victim to this bias. It’s important to remember that there is no such thing as perfect information, and you have to do something different from what’s being done in order to pull ahead of your competitors.

An example of this is the reason companies were slow to begin running Internet marketing campaigns. Indeed, most companies have only recently jumped in even though the cost of search ads, for example, has more than tripled. Any business which had tried this method of marketing sooner was more successful.


Ostrich Effect
I have noticed that almost all the businesses which started to slide into the red would tend to ignore what was happening and continue to pretend that they didn’t need to immediately implement some form of emergency strategy to deal with the problem until it was too late. This is why so many music retailers and book retailers seemed to ignore the impact that the Internet would have on their strategies until it was too late. It is also why so many businesses ignored the impact the recession was having on their strategy until it was too late. You cannot hide from a negative situation, nor can you assume that a negative situation will simply turn itself around. You need to be adaptable, to be able to change your structure in order to remain in business.


Disregard of Regression Toward the Mean
We tend to believe that whatever situation is occurring is likely to continue to occur no matter what is statistically likely. This is why we presume that we should continue to gamble during a winning streak, for example, even though we eventually have to lose and our chances of winning are the same regardless. This is also why people continued to think that the housing market would continue to increase in value forever even though most industries will eventually have to level off or decrease in value. Never assume that growth or other impressive events will simply continue on. You must plan to find ways to replace existing growth or deal with problems that arise because they will eventually happen.