MGT Notes

Reference: Strategic Management (5e) – Frank T. Rothaermel (Pg 58)

Cognitive Biases are defined as systematic errors that interfere with our rational thinking. They form a part of the System 1 mode of thinking discussed in the previous post.

There are six different types of cognitive biases:

1. Illusion of Control:

Here entities show a tendency to overestimate their ability to control events. Oftentimes self-ability is attributed to success. The Top-Down approach to Strategy feeds into this bias since leaders rely only on past static data.

2. Escalating Commitment:

This bias emerges from the concept of the sunk cost fallacy, wherein entities continue to support initiatives despite feedback of it not likely being successful. Doubling down on investments is one erroneous outcome of this bias. The correct approach, which is to ignore the sunk cost and lead with a clean slate approach, is often ignored due to loss aversion felt by the entity. This leads to an escalating commitments to failed courses of action.

3. Confirmation Bias:

Here entities search for information that confirms their beliefs and ignore evidence to the contrary or try to reinterpret information to match their views. Usually, confirmation from earlier experiences supports this bias and entities tend to cling to prior seen relationships between variables.

4. Reason by Analogy:

This bias leads one to attributing simple analogies to complex problems. While some situations may seem simple on the surface, they may be different at a deeper level.

5. Representativeness

This bias stems from the error made in drawing conclusions from small samples. If there isn’t sufficient data available, one can violate the law of large numbers which gives a more accurate estimate of parameters in the presence of a sufficiently large sample of data.

6. Groupthink

Here, entities tend to coalesce their opinions around a leader without each individual critically evaluating and challenging their opinion. This is often seen in cohesive and non-diverse groups.