Distorted Logic Bubbles

In an interesting article from McKinsey Quarterly Charles Roxburgh explains why good executives back bad strategies.

In an earlier blog post  we introduced the concept of the “Logic Bubble”. Edward de Bono

used  the term to describe the set of values, needs, beliefs and experiences that a person sees the world through. We all have a logic bubble and we make choices and behave in ways that are consistent with our logic bubble. Implicitly it is assumed that the brain act rationally on the basis of the logic within the bounded perception space.

However, already in the fifties of the last century HerbertSimon proposed the concept of bounded rationality – the idea that in decision-making, rationality of individuals is limited by the information they have, the cognitive limitations of their minds, and the finite amount of time they have to make a decision. The boundaries of perception could be somewhat distorted. Roxburgh mentions eight flaws he derives from behavioral economicswhich studies the effects of social, cognitive, and emotional factors on the economic decisions of individuals and institutions as opposed to the paradigm that humans make economic decisions rationally.

1. Overconfidence : The overconfidence effect is a well-established bias in which someone’s subjective confidence in their judgments is reliably greater than their objective accuracy, especially when confidence is relatively high.

2. Mental Accounting : mental accounting attempts to describe the process whereby people code, categorize and evaluate economic outcomes. An example of mental accounting is creating new categories of spending like “strategic investment”.

3.The Status Quo Bias : Status quo bias is a cognitive bias; an irrational preference for the current state of affairs. Status quo bias interacts with other non-rational cognitive processes such as loss aversion, existence bias, endowment effect, longevity, mere exposure, and regret avoidance.

4. Anchoring : anchoring or focal-ism is a cognitive bias that describes the common human tendency to rely too heavily, or “anchor,” on one trait or piece of information when making decisions. During normal decision making, anchoring occurs when individuals overly rely on a specific piece of information to govern their thought process. Once the anchor is set, there is a bias toward adjusting or interpreting other information to reflect the “anchored” information.

5. The Sunk Cost Effect : sunk costs are past costs that have already been incurred and cannot be recovered. Sunk costs do, in fact, influence actors’ decisions because humans are prone to loss-averse and framing effects, and in light of such cognitive quirks, it is unsurprising that people frequently fail to behave in ways that economists would deem “rational.”

6. The Herding Instinct : herd behavior describes how individuals in a group can act together without planned direction. The term pertains to the behavior of animals in herds, flocks and schools, and to human conduct during activities such as stock market bubbles and crashes, street demonstrations, sporting events, religious gatherings, episodes of mob violence and everyday decision-making, judgment and opinion-forming.

7. Misestimating Future Hedoninistic States : hedonistic forecasting is the prediction of one’s emotional state in the future. People are surprisingly poor judges of their future emotional states. For example, in predicting how events like winning the lottery might affect their happiness, people are likely to overestimate future positive feelings, ignoring the numerous other factors that might contribute to their emotional state outside of the single lottery event.

8. False Consensus : the false-consensus effect is a cognitive bias whereby a person tends to overestimate how much other people agree with him or her. There is a tendency for people to assume that their own opinions, beliefs, preferences, values and habits are ‘normal’ and that others also think the same way that they do. This cognitive bias tends to lead to the perception of a consensus that does not exist, a ‘false consensus’. This false consensus is significant because it increases self esteem. The need to be “normal” and fit in with other people is underlined by a desire to conform and be liked by others in a social environment. Causes might be confirmation bias, selective recall, biased evaluation and group-think.

In his article Roxburgh give some hints to lessen distortions of perception. Also, there aresome excellent references given.

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