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7 psychological biases to watch out for

  • By Alan Knott-Craig
  • June 11, 2017


All have heuristic biases.


These mental habits make us take short cuts, and can lead us to make stupid mistakes.


The trick is to be aware of our biases, so we can compensate for them in decision-making.


Here are seven common biases in business:


  1. Anchoring bias: You tend to rely too heavily, or “anchor,” on one trait or piece of information when making decisions. For example: Your business plan relies on product pricing that is static, without taking into account margin attrition due to exchange rate movements.


  1. Availability bias: You tend to overestimate the likelihood of events with greater “availability” in your memory. Availability can be influenced by how recent the memories are, or how unusual or emotionally charged they may be. For example: Dramatic news stories of shark attacks make you more scared of being attacked by a shark than by being struck by falling airplane parts, even though you are statistically more likely to be hit by an airplane part.


  1. Confirmation bias: You tend to search for, interpret, focus on and remember information in a way that confirms your preconceptions. For example: If you’ve already invested your savings in a business selling rocking chairs for moms, you will latch onto all news that mothers love rocking chairs.


  1. Optimism bias: You tend to be over-optimistic, overestimating favorable and pleasing outcomes. For example: You’re running out of cash. Instead of facing facts and cutting costs, you double down on the conviction that the big sale is around the corner.


  1. Planning fallacy bias: You tend to overestimate benefits and underestimate costs and task-completion times. As an entrepreneur, your rule of thumb should be to double your estimated startup costs, and double the estimated time to your first sale.


  1. Sunk-cost/loss-aversion bias: You’ve spent a fortune in money, energy, time and reputation to get so far. You’ve long dreamed of the day of being successful. You press on in the hope of getting a return on their investment, even in the face of mounting evidence that to continue would be folly. Your mind struggles to walk away from investments.


  1. Hindsight bias: You tend to look backwards in time and see events as more predictable than they were at the time a decision was made. This bias, also known as the “knew-it-all-along effect,” typically affects those annoying “I told you so” people who never really told you anything.


We all make mistakes in our thinking. Not all of us are aware that we’re making mistakes.


If you’re aware of your mental biases, you’ll make better decisions.


Make better decisions and you’ll win.