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Decision-Making Bias
The U.S. federal courts found Arthur Andersen guilty of obstruction of justice and the company was forced to shut down after Enron went bankrupt in 2001. The court believed that auditors at Arthur Andersen did not knowingly misrepresent Enron’s books, but were likely influenced by self-serving bias when making decisions about how to audit Enron’s finances. Cognitive biases profoundly color people’s viewpoints and there are numerous “cognitive biases” that can influence decision making processes, which often lack a clear goal or objective. System 2 thinking is formal process for rational decision making:
“Define the problem.” Don’t mistake the symptoms for the real problem. “Identify relevant criteria.” Pinpoint what’s important and irrelevant. “Weight each criterion.” Decide how much weight to give each one. “Generate alternatives.” Come up with possibilities without wasting time. “Rate each alternative on each criterion.” This is difficult because it involves predicting how things will transpire in the future, which can be hard to do accurately.
“Figure out the optimal way to solve a problem,” – Use logic and reason to determine which solution is best.
Most people make decisions based on their gut instinct, but that often leads to bad decision-making. People need to rely more on reasoning and logic when making decisions. They should also use common sense heuristics such as:
A heuristic is a strategy or shortcut that allows us to make decisions quickly. For example, if you’re walking down the hallway and see an open office door with someone in it who’s doing something wrong, then your first thought might be that everyone else in the building is also doing their jobs poorly. This is clearly not true, but this kind of thinking can happen because we tend to focus on vivid images and forget about other information. Managers often make mistakes based on these kinds of faulty assumptions; they may decide that all female clerks are poor filers just because one was bad at her job (who happened to be pretty).
The representative heuristic is a judgment based on incorrect or incomplete generalizations. For example, if three dogs with black and white spots walk by your porch, you may assume that the neighborhood is filled with black-and-white spotted dogs, when in reality only those three passed by. This bias can also occur from misjudging chance events. If you invest in five stocks which immediately tank, then purchase another stock assuming that your luck will change; this is illogical because how people judge the sixth company will fluctuate based on nothing to do with your prior investment of five unrelated companies. Using this heuristic could lead to other systematic irrationalities in decision making.
“Affect heuristic” – This is when we make judgments based on emotions, not logic. In an opinion like “I don’t know what it is, but there is just something about that guy that I don’t like,” the potential bias is unlimited. Emotional thinking is almost always misleading.
There are other types of cognitive biases that can affect your thinking and decision making. Some of these are based on availability or representative heuristics, but there’s also framing effects, which is when someone makes a statement in a way that frames the issue in an unfair way. For example, if you criticize current tax policy, they’ll say that means you want to raise taxes for everyone. This is not true because it does not present bona fide alternatives.
Watch how people word things. You may end up basing your decisions on information that is not relevant to the situation. Factor in human emotions when making decisions, because everyone has multiple personalities (selves). One person might spend every penny of his paycheck to satisfy his “short-term” self, while another might invest $50 weekly in a Christmas club to satisfy her “long-term” self. These multiple selves often come into play when people make decisions; use your “umpire self” to negotiate with these individual selves and thus improve your judgments and actions. Hold yourself accountable for your decisions by using an internal negotiation strategy with these individual selves.
