Don’t Fall for these Five Fallacies

Oftentimes leaders believe that they make decisions rationally.  In truth, all decision making is affected by fallacies.  According to Merriam-Webster online, a fallacy is “a false or mistaken idea.”  This is different from making decisions with false facts.  Instead fallacies are the mind’s inbuilt wayward thought processes.  Understanding fallacies and how to avoid them is a step towards better decision making.

There are hundreds of fallacies, but to start here are five common ones to consider.

Sunk Cost Fallacy – A sunk cost is one that has already been incurred and cannot be recovered.  The fallacy occurs when people stick to their initial decision even when it no longer makes sense because they have already invested time and resources.  It is summed up in the phrase: Throwing good money after bad.

Forty-five years ago in the midst of a cut throat battle in the computer memory market, CEO Andy Grove was considering whether to move IBM into the new microprocessor market.  Due to decades of investment legacy IBM employees believed it was first and foremost a memory company.  One day Grove posed a hypothetical question to his colleague Gordon Moore. “If we got kicked out and the board brought in a new CEO, what do you think he would do?” Moore answered without hesitation. “He would get us out of memories.” To which Grove responded, “Why shouldn’t you and I walk out the door, come back and do it ourselves?”

To avoid the Sunk Cost Fallacy, follow Grove’s example and think like a new boss.  Ask yourself, “If I had no attachment to this project would I keep it going?”

Confirmation Bias – It is seeking only data that supports the decision maker’s preferred choice and rejecting all evidence to the contrary.  This is a trap because refusing to consider contradictory information might make us happy in the short time, but could lead to ruin later on.

Nowadays, a prime driver of the confirmation bias is social media.  Author Eli Pariser in his book called “Filter Bubble” showed how confirmation bias is amplified by algorithmic editing.  People only see information they are likely to agree with, while excluding opposing views.  Filters lead to polarization, a fact evident in today’s political environment.

To avoid the Confirmation Bias, actively seek out alternative viewpoints.  Ask yourself, “What would it take to prove my idea wrong?”

Availability Bias – It is making a decision based only on the evidence that is readily available.  Without digging deeper or looking wider, valuable information can be missed. 

Here is a simple experiment to understand availability bias.  Quickly name three large service food/drink franchises?  I suspect your answer included McDonalds, Subway or Starbucks.  The reason they are top of mind is due to the vast number of locations.  Currently there are over 37,000 McDonalds, 41,500 Subways and 30,000 Starbucks outlets.  Odds are one or all of them are located within three miles of your home. 

To avoid the Availability Bias, commit to doing more research.  Ask yourself, “What other sources of information can I seek beyond the obvious?”

Outcome Bias – This is an error made in evaluating the quality of a decision based on the outcome alone.  In short, the assumption is that if the outcome was successful the decision was good.  The catch is that a poor decision can have a good outcome due to dumb luck and vice-versa. 

Competitive sports are very susceptible to the Outcome Bias.  When games come to down to a final shot the winning team gets all the accolades while the losing team’s effort is ignored, despite the small gap between them.  Consider Super Bowl XLIX between the Seattle Seahawks and the New England Patriots.  In the final minute a New England defender intercepted a pass to seal the win for the Patriots.  Seahawk fans were shocked because they assumed their powerful running back would bulldoze it in. Coach Pete Carroll’s defense of the play call was that it was situationally the right call even if the result was horrible. For sports fans the interception colored their view of the Coach’s decision.

To avoid Outcome Bias consider the effects of probability.  Ask yourself, “How much of this outcome resulted from pure chance?”

Anchoring Bias – This is where an individual depends too heavily on an initial piece of information to make subsequent judgments.  In haggling, this is when the first offer set the range for the entire negotiation.

In a study by behavioral economist Dan Ariely, test subjects were asked to write down the last two digits of their social security number.  Then they were shown items whose value they did not know, such as wine, chocolate and computer equipment. They were asked to bid for these items without any other information.  The result was that the participants with higher social security numbers submitted bids that were between 60 percent and 120 percent larger than those with the lower numbers. This showed how a random number can become an anchor.

To avoid the Anchoring Bias, be skeptical about the value of the first piece of information.  Ask yourself, “Does this limited information accurately reflect reality or do I need more?”

It is human to fall for our mind’s fallacies.  However, with awareness and reflection it is possible to mitigate their effects and enable better decisions.  Have fun working with these five!