Cognitive Bias in the Boardroom

Cognitive bias in the boardroom is a danger to decision making. Boards can (should) mitigate the effects of this by understanding it and calling attention to where it can and does come up in the board room. As a group, directors can hold each other accountable and address bias. A learning board will create systems to counter heuristics that can introduce “sever and systematic errors.” 

By Kevin Smith

Boards of directors are not immune from the effects of cognitive bias any more than any other humans. In fact, the group dynamic of the board room of equals my just up the ante on this issue. Do you know where you’ve had cognitive bias in the boardroom? It’s time for some reflection. 

What is Cognitive Bias

Here I’m going to use the definition from Gleb Tsipursky, PhD. (There are many similar definitions with nuanced differences in this fairly new area of science.) Cognitive bias is “a predictable pattern of mental errors that result in misperceiving reality and, as a result, deviates from reaching goals, whether in relationships or other life areas.” This comes from The Bind Spots Between Us (2020).  This is different than social bias, which is learned and is between different groups and is specific to societies. Cognitive bias is common to all of humankind. It’s hardwired in our brains.

The idea of cognitive bias was introduced by Amos Tversky and Daniel Kahneman in 1972 and grew out of their experience of people’s innumeracy, or inability to reason intuitively with the greater orders of magnitude. Tversky, Kahneman, and colleagues demonstrated several replicable ways in which human judgments and decisions differ from rational choice theory. This discovery grew and developed the science of Behavioral Economics. It’s a relatively new and still unfolding.

https://en.m.wikipedia.org/wiki/Cognitive_bias

The Benefits … may have mostly waned

The mental shortcuts, or heuristics, developed as part of our brain’s evolution. In simpler times they helped us make quick decisions that kept us from dying. But that was a different environment than our very modern and complex societies. Nonetheless, our brains are still wired this way, which can push us to decisions that are not supportive of our goals.

There are How Many Cognitive Biases?!

As of a 2020 Wikipedia page, there’s a great illustration of 188 cognitive biases. (Included here. Click it to make it larger.) There are surely more by now. Rest easy. We’re not going through all of them here. But this demonstrates the wide way that these biases can impact our lives and decision making. And studying these can provide great insights to decision making issues in every facet of our lives. Understanding these can help you to counter their negative effects.

What Do Directors Need to Pay Attention To?

So, what is it that directors need to pay attention to in the context of the role of the board of directors? Well, if you listen to Matt Fullbrook of Ground-Up Governance (and you certainly should!), his definition of good governance is “actively creating conditions that are likely to result in an effective decision.” So directors need to examine these biases, understand them and then reflect on how they have, or could, or will, come into play in the board’s decisioning. Identify where you may have already been guilty of succumbing to bias. Then ask what can be done to prevent this going forward.

A Truncated List of Cognitive Biases

Of course, we can’t go through every cognitive bias here. And some of them will be more relevant than others or not relevant at all to the credit union board space. But I’ve identified a short list here that I invite you to review and reflect on. These are things that I see coming up regularly as issues in the credit union space based on the number of board rooms I’ve been in, the number of planning sessions I’ve led, and the number of directors I’ve talked with over the years.

Anchoring Bias

The inability of people to make appropriate adjustments from a starting point in response to a final answer. It can lead people to make sub-optimal decisions. Anchoring affects decision making in negotiations, medical diagnoses, and judicial sentencing.

The Bandwagon Effect

The tendency for people to adopt certain behaviors, styles, or attitudes simply because others are doing so. (Fashion trends are a good example; or remember the GameStop stock event?)

Blind Spot Bias

Recognizing the impact of biases on the judgment of others, while failing to see the impact of biases on one’s own judgment.

Confirmation Bias

The tendency to search for, interpret, favor, and recall information in a way that confirms or supports one’s prior beliefs or values. People display this bias when they select information that supports their views, ignoring contrary information, or when they interpret ambiguous evidence as supporting their existing attitudes. The effect is strongest for desired outcomes, for emotionally charged issues, and for deeply entrenched beliefs.

The Framing Effect

Where people decide on options based on whether the options are presented with positive or negative connotations; e.g. as a loss or as a gain. (Think of marketing that says “95% Fat Free!” rather than “5% Fat.”)

Frequency Illusion (Baader-Meinhof Effect)

After noticing something for the first time, there is a tendency to notice it more often, leading someone to believe that it has a high frequency of occurrence. It occurs when increased awareness of something creates the illusion that it is appearing more often. Put plainly, the frequency illusion is when “a concept or thing you just found out about suddenly seems to pop up everywhere.” (It’s happened to everyone who’s bought a car and now sees that car everywhere!)

Sunk Cost Bias

People demonstrate “a greater tendency to continue an endeavor once an investment in money, effort, or time has been made.” Such behavior may be described as “throwing good money after bad.” (This bias plays on at least five other psychological factors at once.)

Zero Risk Bias

A tendency to prefer the complete elimination of risk in a sub-part over alternatives with greater overall risk reduction.

This last one plays heavy on my mind as I work with credit union boards. We are a very risk averse movement. But sometimes we don’t help as many people as we can because of this aversion.

And I have my favorites: the frequency illusion or Baader-Meinhof Effect. This fascinates me. I also think that the Dunning Kruger Effect is a big deal. No. That’s not on the list above. I’m going to make you look that one up.

What to do About This

Awareness is key. Simply knowing and understanding these can mitigate the effects. But you can also put structures in place for your board meetings and decision-making processes to call attention to these. Before making a big decision, call some of these out and make a conscious check that you are not falling prey to your minds subconscious heuristics.

Here’s my challenge to you: At the start of the next board meeting, ask the room, “have you ever heard of Sunk Cost Bias? Do you think we’ve ever been caught by this?” Then have a conversation.

Resources

I refer to Dr. Tsipursky’s book above.  He makes some recommendations for De-baising Techniques:

1. Identifying cognitive biases & making a plan to address them
2. Delaying our decisions & reactions
3. Probabilistic Thinking
4. Making predictions about the future
5. Considering alternative explanations
6. Considering your past experiences
7. Reflecting on the Future & Repeating Scenarios
8. Considering Other People’s Points of View
9. Getting an External Perspective
10. Setting a policy to guide your future self
11. Making a Pre-commitment

And I follow Graeme Newell (Better Decisions Through Brain Science). He does a great job of explaining these things in a way that helps you take action. Check out his work here.