An Analysis of Decision-Making Biases and Strategies for Mitigation

This report provides a comprehensive overview of several decision-making biases prevalent in a business environment. It begins with an introduction to how individual characteristics and psychological factors influence decision-making processes, including the use of the Myers-Briggs Type Indicator (MBTI) to assess personality traits. The report then delves into specific biases such as confirmation bias, excessive optimism, sunk cost fallacy, the illusion of control, familiarity heuristic, loss aversion, groupthink, overconfidence bias, outcome bias, recency bias, selective perception, and the availability heuristic. Each bias is defined and discussed with examples, and the report also explores strategies to mitigate the negative impacts of these biases. The report emphasizes the importance of recognizing and addressing these biases to improve the quality of business decisions and overall outcomes.

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Decision-Making Bias
Name
Institution

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Table of Contents
1.0 Introduction........................................................................................................................................3
2.0 Decision-Making bias.........................................................................................................................3
2.0.1 Confirmation bias..................................................................................................................3
2.0.2 Excessive optimism...............................................................................................................4
2.0.3 Sunk cost .................................................................. .......................................................... 5
2.0.4 Illusion of control..................................................................................................................5
2.0.5 Familiarity heuristic..............................................................................................................6
2.0.6 Loss aversion.........................................................................................................................6
2.0.7 Group bias.............................................................................................................................7
2.0.8 Overconfidence bias..............................................................................................................8
2.0.9 Outcome bias.........................................................................................................................9
2.0.10 Recency ..............................................................................................................................9
2.0.11 Selective perception............................................................................................................9
2.0.12 Availability heuristic..........................................................................................................10
3.0 Conclusion.........................................................................................................................................10
4.0 List of references...............................................................................................................................11

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Introduction
A person's characteristics, including personality and experience, can affect the means people use to
make decisions. Therefore, a person's susceptibility can either be a positive or a negative influence on
decision making process. From a psychological point of view, the decision is always determined by
needs and enlarged by a person’s preference.
To measure the personality traits of individuals, the Myers-Briggs Type Indicator (MBTI) is used to
diagnose the traits. This is accomplished by categorizing these traits into four major divisions—
thinking and feeling, extroversion and introversion, judging and perception, and sensing and intuition
—this indicator offers a glimpse into a person’s inclinations in regards to decision-making.
Everyone is affected by biases in their own personal way. Biases can warp and damage the objective
contemplation of a decision by adding disruptions to the procedure of decision-making. These
disruptions are usually separate from the point in the decision. Bias is simply the susceptibility towards
error. To put it simply, bias is preconception to arrive at decisions while already affected by a latent
belief. We are commonly unconscious of these biases which can influence our decisions. Through
proper channels and installation of various system, we are able to find out ways to evade these biases.
Learning form mistakes, reviewing decisions (both good and bad) and always double-checking al the
decisions made are some of the ways managers, investors can overcome the biases. This report tackle
the major biases in a business setting. Listed below are some of the most common cognitive biases and
strategies that can be applied to overcome them.
Decision-Making bias
Confirmation bias, a cognitive bias, is a habit to understand information in a way that confirms or
agrees with a prior assumption, meanwhile ignoring those explanations that disagree the previous
assumptions (Palminteri, Lefebvre, Kilford & Blakemore, 2017). Psychologically speaking,

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confirmation bias can be seen even in situations where the idea being proven is a difficult one, this
further proves the kind of influence this bias has on human beings. Individually, this bias can affect
customer decisions, for example, if a client has previous information about a product (even if the
information is wrong), it has a big influence on the decision of whether to purchase a product (Charness
& Dave 2017). Confirmation bias, whether looked at from an individual perspective or a corporate one,
is influential, meaning, people will automatically choose what hit closer to home and ignore everything
else. To curb this bias, one needs the ability to question and evaluate their opinions and decisions and
the decisions of others. Sources of information are the main influence in this instance, therefore,
information sources have to be screened before the information is taken seriously.
Excessive optimism is related to the overestimation of the number of likeable results in compared to
the unlikeable ones (Clark, Robert & Hampton, 2016 ). This kind of bias exists in a huge array of
fields. For example, for the issue of the debt-equity ratio for financing, the main cause for debt
problems presently is corporate management’s previous unrestrained optimism. In addition,
introducing a fresh product into the market is rarely rid of forecasting bias; Therefore, several of the
forecasts contain very many errors. But this is not surprising at all because several of the companies
may unwillingly be engaged in unrestrained optimism, especially when their existence is dependent on
favourable forecasts (Leong & Zaki, 2018). In addition, it’s not only corporations that suffer this bias,
people also show it, both when they are deciding on their investments and in how they live their lives.
In a study to investigate the effects of emotion on the value of stocks, it was concluded that emotion
surely has an effect on asset valuation.
It is very important to stress that the concept of the optimism is not solely considered when judging
probable outcomes. Optimism, which is a requirement to have a positive consideration for oneself, is
closely connected with a mental health and well-being. Several cognitive research from the 70s and 80s

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had proved that moderately depressed people have an absence of optimistic view of the future which
proposes that accurate self-knowledge may not always be positively related to psychological well-being
and that focusing attention on the self may cause negative cognitive state (Leong & Zaki, 2018). This is
not to propose that managers should be mildly depressed. Stress and depression have, in fact, been
proven to have a negative effect on one's health and well-being.
Sunk cost. This refers to an amount already spent and cannot be retrieved at any major capacity
(Minard, 2015). For instance, an entrepreneur an idea for a new business venture, the business idea
looks economically promising. So the entrepreneur invests his own personal equity finance to the idea,
as well as a big start-up investment from investors. After the business has been operating for a while, it
becomes clear the business is not going to succeed, but instead of admitting to failure, the entrepreneur
spends more of the investors’ money instead of returning it to them. Here, the sunk cost bias has led the
entrepreneur to betray his financial investor's trust and fail to spend their investment responsibly
(Feldman & Wong 2018). Sunk cost misconception mostly added to risk aversion to produce decisions
that will not incur any further expenses because it is mostly concentrated on the minimizing cost of
already spent resources rather than maximizing future expenses (Feldman & Wong, 2018). This type of
decision making is grounded upon the over-commitment of people or managers to make an idea/
project work even if it is economically inadvisable. Once a decision is related to a person with high
responsibility, the financial resources dumped into that project will be unreasonable. This proves that
there is a relationship between the weight of assumed responsibility and the resources invested in a
project as argued by Minard (2015).
The illusion of control can be defined as the habit of individuals to trust that which they can control
and/ or affect the result of in real life than that which they have no control over (Stefan & David, 2014).
This kind of bias is seen in everyday life, for example, it may include situations like successfully

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rolling a dice to a double sixes or picking winning lottery numbers. The illusion of control grants
people the wrong idea that result can be affected by individual involvement when the real life is quite
different. Plus as Yarritu, Matute and Vadillo (2014) state that individuals usually show overconfidence
and illusion of control, confirming their assumption towards the mistake. The easiest way to deal with
the illusion of control is to maintain the course of the transaction, for example, in the case of investors,
it would assist if the investor kept a list of the characteristics that are identified to be in favor of the
investment.
The familiarity heuristic argues that individuals’ capacity to views actions as likely to occur is
dependent on their ability to remember a particular information linked to that action (Schwikert &
Curran, 2014). The familiarity they have with that information will surely affect their decision making.
Familiarity heuristic can be defined as what that proves how the bias of availability is linked to how
easy one can recall. Familiarity bias is most prominent in marketing. Bui, Hamilton & Kemp (2015)
argued that the insight people have over a certain brand is dependent on how much they are familiar
with products from that brand. So when a customer is considering a purchase their decision to buy one
product over the other is affected by their level of familiarity with that product, if their familiarity with
the product is high, their decision to buy the product will be fast and easy (Huang, 2016).
Another bias is loss aversion or prospect theory. This is linked to people's strong wish to avoid losses
and instead make any sort of gain (Aperjis & Balestrieri, 2017). It is important to note that loss
aversion will be more severe when the issue is viewed from a negative angle, people make a much
worse decision when facing a negatively formulated dilemma (Heeren, Markett, Montag, Gibbons &
Reuter, 2016). Risk aversion theory specifically states that losses are felt twice as much by individuals
compared to similar profit (Imas, Sadoff & Samek, 2017). The theory of loss aversion is evident in both
business and in everyday life. In a study to determine individual tendency towards loss and profit, it

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was deduced that the loss view gave much fewer acknowledgments than a gain view, affirming once
more that people are less ready to enter a negotiation when they are less likely to gain from it, this is
because they are not prepared to deal with that loss (Piccolo & Pignataro, 2018). Psychologically
speaking, individuals have a tendency to deceive and shun all in a bid to maintain the ownership of a
property rather than getting it in the first place. A case study would be the Wesfarmers where the risk
aversion bias is more present, the risk management policy there is reviewed annually by a qualified
Board members. The last review was done in May 2017. The aim is build a policy of risk aversion and
report. This policy will contain a procedure for risk reporting and avoidance of group risk alongside a
detailed manifesto of risk management functions among the Board, top management, finance director
and audit and risk committee. This just shows the lengths such big companies go to avoid any loss.
They involve the council of top management.
Group factors that influence decision making
In groups, most people desire the peace and state of agreement in the group and would go to various
lengths to protect that harmony. This is called Groupthink (Griffiths, Erlinger, Beesley & Le Pelley,
2018).. It is arguably the most influencing factor in the process of decision-making in a group setting.
Groups like this remove themselves from outside influences and cast a shadow that does not allow for
input from without the group. According to the members this eliminates any room for conflict and
shuns the group from discussing different opinions. The dynamics of the group demands members to
shun from making controversial remarks, this leads to a loss of a person's intelligence, liberty and their
distinct personality (Griffiths, Erlinger, Beesley & Le Pelley, 2018).. The non-functional structure of
that group produces a mirage that trick its member in the decision-making abilities of the group. And
since every group has an opponent, this might lead them to undermine their rival group. In addition,
groupthink can result in some activities that dehumanize other groups (Griffiths, Erlinger, Beesley &

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Le Pelley, 2018).
Groups are only very well productive when all opinions and alternatives are considered. Team leaders
have a responsibility to create an environment rid of discrimination.
Another bias is overconfidence which influences decision making, both in the business world and in
personal investments. Overconfidence can be defined as how firmly individuals grasp their own
abilities and the boundaries of their knowledge (Jeong-Ho & Daecheon, 2018). Generally, individuals
tend to overestimate their capability to well perform. And, in turn, it causes impulsive decisions
because managers who assume they know more than they really do are too confident in their own
capabilities (Salehi, Abdoli & Eskandari, 2017). They, then fail to seek advice and help when making
any major decisions. It is for this reason that emerging entrepreneurs are prone to conducting research
and asking for help, before starting out, than the more seasoned ones. This assumption is confirmed by
the overconfidence portrayed by most successful entrepreneurs (Navis & Ozbek, 2017).
The negative side of overconfidence only shows itself in situations where individuals do not admit to
their weakness and hence, make wrong decisions on a large scale (Porto & Jing Jian, 2016). In regards
to ethical issues, it is due to the overconfidence bias that individuals will always take ethical issues for
granted. People just assume that they are of good character and are, therefore, going to do the right
thing should they come across an ethical challenge. Recently studies have shown that the
overconfidence bias might make individuals to over-calculate the amount or the frequency at which
they will volunteer, at the very least, their time to charitable organizations or work (Navis & Ozbek,
2017). So, overconfidence being a part of our innate personality makes us act without any genuine
thought and that is the major cause for unethical behavior.
Investors and managers need to validate their information to avoid the problem of mistaking the
amount of information received with the worth of that information (Porto & Jing Jian, 2016). Managers

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also have to double check on the accuracy of their judgment. Gaining more information on something
does not necessarily increase the accuracy of judgment but instead increases the quantity of the
information which may only look like an improvement in the accuracy of said information.
Other forms of bias include; Outcome bias- judging and making a decision based on previous
outcomes (Griffiths, Erlinger, Beesley & Le Pelley, 2018). Entrepreneurial environments overly
emphasis on outcome which is culturing a generation bent on outcome. This has hardened the
environment in such a way that the only option to succeeding is to win. The culture then sieves out the
losers who get to watch their counterparts succeed. A good example would be the booming social
media business, where in the course of its rise only a handful of people warned of the means by which
these companies were gaining popularity. They obtained client information which was used to fuel the
growth. Today everyone is bearing witness to the outcome bias in social networking business.
Recency. This is the habit to heavily regard new and latest information over the old ones (Nelson
2014). Take the example of Wesfarmers where in almost all the reports released, they inform their
investors how much they intend to learn for their challenges and encourage their managers to use new
and latest information to make decisions. This is from a 2015 report 'Some of the sustainability
challenges are common across the company. But as you will read in this report, many more are unique
to our individual divisions...' and '...That’s why we encourage our managers and employees to bring
their own diverse experiences and expertise to the table and to think innovatively about how to meet
these challenges so they are connected to the most appropriate solution'.
Selective perception or self-attribution bias. This is the act of allowing expectations to shadow how
people perceive the world (Costa, Carvalho, Moreira & Prado, 2017). There are only two categories of
self-attribution bias; self-enhancing bias- a situation where a manager or an investor gives themselves
too much credit for instances where they made a good decision and self-protecting bias- a situation

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where managers vehemently deny their wrong-doing and mistakes when making a crucial decision. To
deal with this bias, it is first important to note that generally, everyone tends to give themselves more
credits for their success than failure. It is for this reason that managers and investor need to look as
objectively as possible any and all decisions facing them.
Lastly, availability heuristic. people usually underestimate the information in front of them (Lieder,
Griffiths & Hsu 2018 ), for example, a person might argue that smoking does not kill simply because
they know someone who smoked four packs a day and lived for one hundred years. This would then
affect their decision-making process and even hinder him from accepting advice from anyone. There
are four major classifications of availability bias, returnability bias, availability bias through
categorisation, narrow range of experience and resistance (Lieder, Griffiths & Hsu, 2018). To avoid
availability bias, Costa, Carvalho, Moreira & Prado (2017) states, managers need to strictly and
carefully research their decision making sources. And for investors, studies have shown that individuals
tend to favour new information as opposed to old news, they should refrain from that and consider
investing in long-term investments rather than new and cheesy short-term investments.
Conclusion
In conclusion, given the obvious nature and abundance of cognitive biases that surround us, it is
important to devise ways to deal with these biases. Setting up systems that review and consider all the
decisions made is a sincere way to make sure that there is always an objective perspective on all
decisions. Managers should also admit and learn from their previous mistakes to better equip their
decision-making process.

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