7 Sneaky Cognitive Biases That Lead to Bad Decisions

by Corey Pemberton 8 Minutes

Becoming a successful entrepreneur requires lots of hard work and smart decisions.

You’ll get better at both of those things with plenty of practice. By grinding it out day after day, you’ll figure out how to increase your output and discipline.

But what about decision-making?

What separates a great decision-maker from a decent one?

Making decisions and learning from the consequences will help. But your skills will eventually plateau unless you learn to recognize – and account for – your natural cognitive biases.

Today’s post shows you show!

The Tricks Your Brain Plays

Our brains are more powerful than supercomputers.

They also like to play tricks.

These little quirks in cognition can turn good decisions into bad ones. We think we’re making rational choices, but because we aren’t processing the information properly, it’s hard to get it right.

Even if we’re very conscious and deliberate about every decision, a lack of awareness of cognitive biases drives us into the same old traps.

The consequences of not accounting for cognitive biases are all too real. Wasted time. Wasted money. And too many wasted opportunities to count.

Spotting Cognitive Biases – and Avoiding Them

The good thing about cognitive biases: they’re universal.

Because they affect us all – no matter our age, gender, or anything else – you can study the most common pitfalls and immediately apply what you learn to make better decisions.

Here are seven of the sneakiest cognitive biases around:

1. Confirmation Bias

Image credit: TeroVesalainen

Confirmation basis is one of the most well-known – and dangerous – cognitive biases.

The gist: we subconsciously seek out information that supports our preexisting views. When faced with information challenging those beliefs, we downplay it or overlook it entirely.

This has a sneaky way of working into your business. If you’ve been an entrepreneur for a while, it’s natural to develop views about the “best” ways of doing things. You think you understand the best way to handle marketing. And customer support. And so on.

The internet makes it easy to place yourself in an echo chamber that reinforces those views… and nothing else. Because you only visit websites and interact on social media with people you agree with, you lose sight of possible alternatives.

Make a habit of reading other business philosophies. Invite people to challenge you, especially if you work together. Check out case studies of businesses who are successful doing things differently.

2. Gambler’s Fallacy

Image credit: 466654

If you flip a coin and it lands on heads five times in a row, what’s the likelihood of it landing on tails on the sixth?

Still 50 percent!

Most of us understand that logically. But we’re still more likely to bet on tails.

Why? The gambler’s fallacy causes us to place too much weight on past events. We think that because an outcome has been a certain way often in the past, our luck is bound to turn around.

You can see why this bias can lead to gambling addiction; lose a lot of money, but keep playing expecting the odds to magically improve.

It happens in business too. If you aren’t careful, you might find yourself doubling down on unsuccessful ad campaigns because you think your luck is bound to change. Or working with problem clients (after spotting red flags) because you assumed they’d be different.

It’s easy to let the past influence how you make decisions right now. But to decide rationally, you have to assess the odds in this current moment. No more, and no less.

3. Negativity Bias

Image credit: RyanMcGuire

Negative information affects us more strongly than positive information.

This is why you might overlook 10 compliments and dwell over one insult. It’s why news stories about natural disasters and political scandals overshadow stories about community, altruism, and innovation.

Your negativity bias can sabotage your business, if you let it.

Imagine you develop a new product. After a ton of hard work, you send it out to a lucky group of people for a beta test. Most feedback is overwhelmingly positive – except for a few snide comments.

If you focus too heavily on the rare negative feedback, you might end up changing features that almost everyone likes or even scrapping the entire product.

Hopefully you can see how dangerous this is!

You can’t be everything to everyone. It might be time to raise your prices, narrow your market, or assert your boundaries with a pushy client.

Collecting positive feedback and reviewing it during moments of doubt can help you fight off this bias.

4. Dunning-Kruger Effect

Image credit: Unsplash

Are you an above average driver?

The vast majority of you just nodded your heads.

It’s a statistical impossibility, but it’s no match for our emotional brains.

The craziest part?

Some of the worst drivers count themselves as among the best. They’re irrationally overconfident, suffering from a cognitive bias known as the Dunning-Kruger effect.

The worst drivers assume they’re great because they can’t even distinguish competence from incompetence. They wouldn’t know what “good driving” looked like if it smacked them in the face.

The same goes for business. It’s easy to feel overconfident when we’re just starting out. Because you can’t yet tell the difference between a good and bad business, you might find yourself making impulsive decisions.

The corollary to this: as you gain experience, you might struggle with self-doubt. You subconsciously assume that your competitors and customers are just as skilled as you are.

Until you have a firm grounding in the fundamentals, proceed with caution. Experienced entrepreneurs, on the other hand, have to remember to be bold and trust themselves.

5. Loss Aversion Bias

Image credit: Myriams-Fotos

We’re willing to work harder to keep what we have than get something new. It’s more valuable to us to not lose 10 dollars than gain 10 dollars.

This is the loss aversion bias in a nutshell. Millions of years of evolution, most of them when resources were scare and competition was fierce, have primed us to fight hard to hold on to what we have.

That worked well in the past. But in the modern business world, loss aversion is something that can quickly turn into an obstacle.

It’s easy to justify continuing to work with a terrible client – just because the income is a sure thing. You might find yourself going out of your way, spending way more time than you should, just to hold onto ultimately negative relationships.

If you knew for every five dollars you spent advertising you’d make six, your logical brain would tell you to do it every single time. But if you let loss aversion have it’s way, you’d never advertise in the first place.

Investing money – performing small experiments – might be one of the best ways to make a whole lot more. You can always start small, track the results, and work your way up. But you’ll never know for sure unless you’re willing to take a risk.

Next time you think about investing some money, write out a worst-case scenario. How would your life be affected if you lost it? Often, it isn’t nearly as awful as it seems. What if everything went well?

6. Halo Effect

Image credit: anikaskywalker

The halo effect describes how our overall impression of someone affects how we feel about his or her character and specific traits.

You might as well call this the “judge a book by its cover” bias.

Imagine seeing a charismatic, good-looking actor try stand-up comedy for the first time. Because you find them attractive and likable, you’re more likely to find them funny as well. You’ll laugh at their jokes… even if you wouldn’t have laughed when a less attractive, less likable comic told the same ones.

This has huge consequences for your business. Details matter. If you’re the most skilled marketing consultant in your area but have an ugly website, potential clients will see you as incompetent.

All of this sounds a bit shallow, but we can’t ignore reality. The cool thing about the halo effect: subtle improvements in how you present yourself as a brand will make prospects more likely to view you as a true expert.

Take a good look at how you’re presenting yourself now. Do you have a professional website? A high-quality photo with you wearing nice clothes? Positive social media posts instead of endless negativity and rants?

Think about all the small tweaks you could make to boost your image. The more attractive and likable your brand, the greater your chances of success.

7. Reactance Bias

Image credit: NeuPaddy

For a natural-born contrarian like myself, the reactance bias is one of the most dangerous traps around.

Sick and tired of having people tell you what to do? Tempted to assert your freedom by doing the opposite?

You might be giving in to the reactance bias.

We creative types despise being constrained. All we want is to be ourselves, but we can’t help but feel the world is trying to put us in a box.

Unfortunately, this can lead to some pretty crazy business decisions. We might overlook solid advice – timeless principles – just because we want to do something different.

Let’s say you have a website that looks nothing like the typical website in your niche. It might be super cool and innovative, but visitors could have a hard time figuring it out. They come into every interaction with a certain set of expectations. When those aren’t met, they scram!

I’m not saying to be boring or to never innovate. What I’m suggesting is something far more moderate: accept the fact that there are timeless business principles worth learning. Then put your own spin on them without defying customer expectations.

The bottom line? By all means, run your business differently. But don’t just do it for the sake of being different. Ground those decisions with the intention of better serving customers.

Your Turn

All of your strongest competitors work hard. What truly separates the very best from everyone else is their ability to make great decisions.

Far too many of us have gotten off track by falling into the same old traps. Fortunately, once you understand the most dangerous cognitive biases, it’s easier to account for them and make the decisions needed to take your business to the next level.

There’s no better time to start than today.

Have you ever made a bad decision due to one of these cognitive biases? Which one? How do you ensure you’re making the best decisions possible? Leave a comment below and share your experience!

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by Corey Pemberton
Corey Pemberton is a freelance copywriter and blogger who helps small businesses and software startups get more traffic and conversions online. You can find him on his website or follow him on Twitter.