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Overcoming Organizational and Individual Biases

Rational Decision-Making Process

1) Define the problem

2) Determine criteria

3) Gather Data

4) List & Evaluate Alternatives

5) Choose & implement solution,

6) Follow up

Degree of Acceptable Risk: decisions are made in the context of risk therefore all business decisions are probability decisions.
• Risk propensity – low risk takers: may collect & evaluate more; could become paralyzed considering too much information
– high risk takers: may jump to decisions too quickly & with too little information

Individual Cognitive Biases

1) Confirmation Bias: seeking information that confirms early beliefs and ideas – the more time you have the more likely you can overcome confirmation bias – have someone play devil’s advocate and be aware you can fall into this trap.
2) Escalation of Commitment Bias: not treating past investments (time, effort, & money) as sunk-costs when deciding to continue an investment – ppl continue projects that already have a lot of time and money invested in them.
3) Availability Bias: Relying too much on information that is easy to recall from memory (ex. lottery winners, medically diagnosing yourself).
4) Anchoring Bias: Emphasizing too much the first number or value encountered – Set an anchor around which you make your decision (ex. selling a home)
5) Framing Bias: Making decisions based upon how the problem is presented.
6) Representativeness Bias: Tendency to make decisions based on how similar something is to a preconceived category – description fits a preconceived notion that we already have (not necessarily statistically correct)
7) Small Sample Bias: Relying too much on information from a small sample of all possible data. (ex. focus groups)
8) Overconfidence Bias: Believing too much in our own ability to make good decisions. (ex. MBA students, small bus owners, professors)

Takeaways
– Overcome biases by using rational decision-making model
– As much as possible, put systems into place that force you to gather data and run the numbers before making decisions.

Group Decision Biases
1) Groupthink: Premature consensus due to conformity pressures – symptoms include: self-censorship, pressure, unanimity, rationalization, invulnerability, mindguards, morality, stereotypes – particularly prevalent in groups that are cohesive – can happen when you think you’re wrong or you think you’re right but don’t want to cause any waves.
2) Risky Shift: Choosing a riskier course of action due to diffusion of responsibility
3) Common Information Bias: Discussing only information that everyone already shares – overemphasizing information held by a majority & failing to be mindful of information held by one or a few group members.
4) Diversity-based Infighting: Diverse ideas fracture the group and create ill will – can happen when no mechanisms exist to channel disagreement in productive ways or when individuals feel strongly about their idea.

Techniques for Overcoming Group Biases
1) Nominal Group Technique: where individual members meet to pool their judgments in a systematic but independent fashion – a) indivs silently and w/o discussion write down their ideas, b) each member presents one idea at a time until all are presented w/o discussion, c) ideas then discussed to clarify and evaluate, d) silent & independent vote or ranking of alternative choices
2) Devil’s Advocacy:indiv or subgrp argues against the recommended actions and assumptions put forth by other members of the group – overcomes tendency of grp to avoid conflict when evaluating alternatives – not typically good when there’s diversity-based infighting because this tends to produce more fighting
3) Dialectical Inquiry: debate between very different sets of recommendations & assumptions to encourage full discussion.

Takeaways
– Use the rational decision-making model!
– Decisions made by grps are often better than decisions made by indivs
– Groups are prone to social biases that may reduce the quality of their decisions
– The use of specialized group decision-making techniques can reduce the effects of the biases

Nate Nead on LinkedinNate Nead on Twitter
Nate Nead
Nate Nead is a licensed investment banker and Principal at Deal Capital Partners, LLC which includes InvestmentBank.com and Crowdfund.co. Nate works works with middle-market corporate clients looking to acquire, sell, divest or raise growth capital from qualified buyers and institutional investors. He is the chief evangelist of the company's growing digital investment banking platform. Reliance Worldwide Investments, LLC a member of FINRA and SIPC and registered with the SEC and MSRB. Nate resides in Seattle, Washington.
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