The Big Idea: Before You Make That Big Decision...

Thanks to a slew of popular new books, many executives today realize how biases can distort reasoning in business. Confirmation bias, for instance, leads people to ignore evidence that contradicts their preconceived notions. Anchoring causes them to weigh one piece of information too heavily in making decisions; loss aversion makes them too cautious. In our experience, however, awareness of the effects of biases has done little to improve the quality of business decisions at either the individual or the organizational level.

Though there may now be far more talk of biases among managers, talk alone will not eliminate them. But it is possible to take steps to counteract them. A recent McKinsey study of more than 1,000 major business investments showed that when organizations worked at reducing the effect of bias in their decision-making processes, they achieved returns up to seven percentage points higher. (For more on this study, see “The Case for Behavioral Strategy,” McKinsey Quarterly, March 2010.) Reducing bias makes a difference. In this article, we will describe a straightforward way to detect bias and minimize its effects in the most common kind of decision that executives make: reviewing a recommendation from someone else and determining whether to accept it, reject it, or pass it on to the next level.

The Behavioral Economics of Decision Making

For most executives, these reviews seem simple enough. First, they need to quickly grasp the relevant facts (getting them from people who know more about the details than they do). Second, they need to figure out if the people making the recommendation are intentionally clouding the facts in some way. And finally, they need to apply their own experience, knowledge, and reasoning to decide whether the recommendation is right.

However, this process is fraught at every stage with the potential for distortions in judgment that result from cognitive biases. Executives can’t do much about their own biases, as we shall see. But given the proper tools, they can recognize and neutralize those of their teams. Over time, by using these tools, they will build decision processes that reduce the effect of biases in their organizations. And in doing so, they’ll help upgrade the quality of decisions their organizations make.

The Challenge of Avoiding Bias

Let’s delve first into the question of why people are incapable of recognizing their own biases.

According to cognitive scientists, there are two modes of thinking, intuitive and reflective. (In recent decades a lot of psychological research has focused on distinctions between them. Richard Thaler and Cass Sunstein popularized it in their book, Nudge.) In intuitive, or System One, thinking, impressions, associations, feelings, intentions, and preparations for action flow effortlessly. System One produces a constant representation of the world around us and allows us to do things like walk, avoid obstacles, and contemplate something else all at the same time. We’re usually in this mode when we brush our teeth, banter with friends, or play tennis. We’re not consciously focusing on how to do those things; we just do them.

In contrast reflective, or System Two, thinking is slow, effortful, and deliberate. This mode is at work when we complete a tax form or learn to drive. Both modes are continuously active, but System Two is typically just monitoring things. It’s mobilized when the stakes are high, when we detect an obvious error, or when rule-based reasoning is required. But most of the time, System One determines our thoughts.