Sunday, December 6, 2009

Be Aware of Cognitive Roadblocks to Good Decision Making

Perhaps the most important skill of an effective business leader is the ability to make good decisions. Yet as leaders we are susceptible to cognitive biases that can hinder the decision making process. Cognitive biases are simply distortions in our perception of reality that can occur when we use traditional shortcuts to help us make choices. Most of the time, shortcuts allow us to arrive efficiently at a good decision. Sometimes, however, making choices in the most economical manner based on familiar rules of thumb is not the right thing to do. Even competent, knowledgeable, and experienced business leaders can get caught up in this trap. Because we are human, we will never completely overcome our natural biases, but we can learn to make better choices by simply being aware of cognitive roadblocks to good decision making.

Cognitive biases can take many forms, but in the case of the Mount Everest tragedy of 1996, three types of bias contributed significantly to a disaster in which two expeditions were trapped in a storm near the top of the mountain and five people died. Those cognitive biases are:
• The overconfidence bias
• The sunk-cost or escalation of commitment bias
• The recency effect

In May 1996, two commercial expeditions consisting of customers who paid up to $65,000 each to be professionally guided to the summit of Everest (the world's tallest peak) became trapped in a blizzard high on the mountain. This tragic event was immortalized in Jon Krakauer's famous best-seller, Into Thin Air (Krakauer, a journalist, accompanied one of the expeditions). Two of the world's best-known and most experienced mountaineers, Scott Fischer and Rob Hall, served as expedition leaders. In addition to the financial outlay, the effort to reach the summit of Everest requires a huge time commitment; climbers must spend six weeks acclimatizing their bodies to the high altitude. The two teams established a series of base camps at ever-increasing heights, and then embarked on an arduous 18-hour round-trip to reach the summit. An unexpected and violent storm moved in, killing both Fischer and Hall, and three other climbers.

In a pamphlet entitled, The Art of Critical Decision Making, Professor Michael Roberto of Bryant University identifies the three primary cognitive biases that reared their ugly heads to contribute to the Everest disaster.

First, both Fischer and Hall demonstrated the overconfidence bias. Research shows that human beings have a consistent tendency to be overly optimistic. For example, even experienced physicians tend to be unrealistically positive in their diagnoses. In talking about Everest, Scott Fischer said, "We've got the Big E completely figured out, we've got it totally wired. These days, I'm telling you, we've built a yellow brick road to the summit." Other members of the team became cocky as well. Jon Krakauer described several of the highly inexperienced amateur climbers as so overconfident in their own abilities as to be "clinically delusional."

The second cognitive bias is the sunk-cost effect. A rational actor makes choices based on the marginal cost of pursuing one choice over another. In contrast, the sunk-cost effect causes people to continue in a sometimes disastrous course of action in which they have invested significant time, money, and/or effort. On Everest, expedition members refused to allow their huge financial expenditure and many weeks of herculean effort to be for nothing. With the blessing of their leaders, they pushed ahead to the summit, even in violation of well-established turnaround times. A number of climbers reached the top too late in the afternoon, and were forced to descend the mountain while negotiating a furious storm in the dark.

Another common term for this same basic phenomenon is the escalation of commitment bias. Consider America's experience in Vietnam, or the current debate about Afghanistan. We have spent eight hard years fighting in that troubled country at great cost in blood and treasure. To be sure, all of our choices there are tough ones. Yet the argument still centers not on whether we should withdraw, pursue a different strategy, or otherwise cut our losses, but rather at what level we will continue the effort.

The final cognitive bias is the recency effect, which simply refers to the tendency to place a disproportionate value on information obtained recently. This data is most salient to us, but can cause us to overlook other relevant information. On Everest, team leaders were fooled by a string of years in which good weather had prevailed on the mountain. One commentator said, "Season after season, Rob [Hall] had brilliant weather on summit day. He'd never been caught in a storm high on the mountain." No one prepared for the worst case scenario. Disaster resulted because of this failure on the part of leadership to consider ample data that demonstrated that in past years, deadly storms had been a common occurrence on Everest.

Think about your own decision making as a business leader. Have you ever allowed overconfidence, sunk-costs, or recency to sway your mind one way or the other? Don't be too hard on yourself if the answer is yes. Despite what economists would have us believe, none of us are perfectly rational actors. We all occasionally yield to a lifetime of biases. Nevertheless, we can improve our decision making if we develop the self-knowledge to be aware of these tendencies and, wherever possible, to overcome them.

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