Corporate Dynamics

Heuristics and cognitive biases in risk-related decisions

by Decebal Marin

Every day we make thousands of decisions, small or big, better, or worse. Although most of them bring us the desired results, some of them have consequences that we end up regretting.

If you are interested in understanding how the human mind works and what influences our beliefs and decisions in the face of risk, then the following text is for you.

What do you think? When people take risks, do they do so consciously and rationally, or not?

One brain, three minds

The common belief is that our decisions are made in the brain, and the brain is a supercomputer that directs our actions. However, it seems that things are not quite like that.

The fact that our head hurts when we focus on solving a problem, that we feel butterflies in our stomach when we fall in love, or that we make decisions with our heart, makes us think that our decisions are not made strictly rationally, at the level of the brain.

One of the important findings of current neurophysiological and neuropsychological research is that our mind is embedded throughout the body and is not limited to brain activity.

The brain does not make decisions independently, but rather hosts conversations between the body’s three self-operating systems: endocrine, nervous, and immune.

If it were not so, we could increase our immunity and control our emotions very easily and change our emotional state instantly.

Studies show that the heart is not just a pump and that our digestive system is not just a filter for food. The heart and gut are a significant part of the personality and the human being and make up what we call “our mind”. These confirm a fact also supported by the world’s great religions: that the human mind differs from the brain and that it has at least three centers – the head, the heart and the gut.

Dr. Robert Long tells us that the human mind works in three modes and at three speeds. In other words, we have one brain and three minds:

Mind 1 – rational and slow; it is responsible for rational, systematic, and logical decisions that require effort and resource consumption.

Mind 2 – irrational and accelerating; it brings together the results of our experiences, trial and error approaches. This is where heuristics are formed.

Mind 3 – automatic and fast; it helps us to think intuitively and non-rationally, automatically.

For reasons of efficiency and security, 90% of our decisions happen in Mind 2 and Mind 3, where the processing speed is very high.

According to Norrtrande’s research (The Use Illusion), the speed at which the unconscious processes information is 10 billion bits per second, while the rational mind operates much more slowly, at a speed of only 10 bits per second.

If we had to think of a scenario for each possible option, we would need a lot of time, even for the simplest choices.

Rational thinking is slow and irrational thinking is super-fast.

Heuristics

To quickly adapt to environmental challenges, our mind unconsciously use mental shortcuts called heuristics. The concept of heuristics was introduced by Herbert Simon, an outstanding thinker and Nobel laureate, in 1950.

Heuristics are simple ‘’rules of thumb’’ that help us make decisions with minimal mental effort and adapt quickly in complex and uncertain situations. Some of them are developed and inherited during human evolution, and others we develop through direct learning.

Daniel Kahneman – laureate of the Nobel Prize in Economics in 2002 continued with Amos Tversky the research of heuristics and prejudices and identified the bases of the most common human errors. They identified the first three heuristics: availability, representativeness, and anchoring–adjustment. What does it refer to?

Availability heuristic – people tend to judge things based on the latest information/news or the immediate examples that come to mind. We thus consider things or solutions that are easier to remember as more important.

Representativeness heuristic – refers to estimating the probability of an event by comparing it to a prototype that already exists in our minds. Often this prototype is constructed in a limiting and subjective way.

Anchoring-adjustment heuristic – defines the tendency of people to be strongly dependent on the initially received information, called “anchor” and to adjust their subsequent decisions as close as possible to it. If the anchor is far from the real value, it can cause unwanted consequences.

Currently, the number of identified heuristics is much higher, and they are the subject of study in the discipline of social psychology.

For those passionate about the subject, the research and books written by Damasio, Claxton, Raaven, Fuchs, Norrtranders, Gigerenzer, Kahneman and Tversky, provide more details and open new horizons.

Cognitive biases

Although heuristics can help us solve problems quickly and provide results as good or even better than some analytical methods, they can also generate systematic errors in thinking.

These errors are called biases, and they represent our biased preferences or inclinations for a particular perspective, outcome, or ideology. Some of these errors in judgment are based on cognitive factors and can lead to distortions of perception and illogical actions.

For illustration, below is a list of cognitive biases devised by Buster Benson and John Manoogian III.

Obviously, the list is subjective, incomplete and contains cultural biases.

Cognitive biases have multiple causes and can appear due to heuristics but also other factors such as: stress, the limited capacity of the brain to process information, social influence, emotional and moral motivations at a personal level.

Managerial heuristics

In organizations, along with general heuristics, we also encounter intentionally developed managerial heuristics.

They are created by managers based on personal experience and lessons learned throughout their studies and careers. They act as agreed decision-making tools and help the company navigate safely and successfully through uncertainty.

Here are some examples of managerial heuristics:

• Think globally, act locally
• Start small, grow organically
• If you don’t have a competitive advantage, don’t compete
• If you can’t compete, partner up
• Don’t be totally dependent on a single supplier
• Work with people who are compatible with you. Choose them based on compatibility rather than expertise (compatibility heuristic)
• Put people first. Gather the best talent, give them operational autonomy and trust their work (Theory-Y Heuristic)
• Give people detailed instructions and make sure they follow them. Motivate your employees with rewards and punishments. Talents don’t matter, only supervision does. (Heuristic Theory-X).

Over time, heuristics go through a process of proverbialization and become short, catchy, and easy to reproduce:

• The customer is always right
• Don’t put all your eggs in one basket
• If you want, you can
• Time means money
• When there are more than three “if”, don’t get involved
• Football is played on goals
• Be part of the solution, not the problem etc.

We see an inherent connection between heuristics and proverbs, as both are decision making rules, short and memorable.

However, proverbs have force and meaning only if they are invoked and explained in particular situations of judgment and action.

Cognitive biases in risk analysis

Researchers show that intentional managerial heuristics generate better results when it comes to making decisions under conditions of uncertainty than when decisions are about risk.

Although well-intentioned, some managerial heuristics contribute to errors of judgment and cognitive biases that can sometimes lead to serious accidents.

Among them are the following:

• All accidents are preventable
• Safety is a priority
• Safety first, then people
• Our objective = zero accidents
• Safety is a choice you make consciously
• Safety means the absence of accidents.

Analyzing the safety signage, messages displayed in organizations, discourse and metaphors used by managers when talking about occupational health and safety, provides us with valuable information about the subconscious factors that influence risk judgment and decisions.

The organizational environment, work overload, very short deadlines, frequent overtime hours, exclusive focus on results, threats from the boss and repeated exposure to various stressors affect our judgment and the way we make decisions.

Understanding heuristics and cognitive biases explains why some workers take risks out of overconfidence and why we have managers who keep old and dangerous equipment running despite overwhelming evidence of imminent accidents (status quo bias).

Currently, most of the measures taken following the investigation of work accidents are limited to the traditional administrative, engineering, technological and system controls.

This is a consequence of the fact that risk analysis and prevention measures focus on conscious thinking and almost completely ignore cognitive heuristics and biases.

Below is a list of some cognitive biases that distort thinking in the face of danger and frequently lead to workplace accidents:

Availability Bias: We place greater value on information that comes to mind quickly. In the absence of safety alerts and primed by messages like “265 days without occupational accidents”, the degree of exposure to dangers increases, because people become careless and see correlations where there are none.

Confirmation Bias: We favor information that is consistent with our beliefs and ignore inconsistent evidence. In this way, in the situation where although there is evidence and clear statistics of accidents in other factories in their work area, some operators still tend to believe that the dangers are not real and the injured were less careful than they were.

False consensus: This is the tendency to overestimate how much others agree with you. It appears, for example, in the situation where the lack of wearing Personal Protective Equipment – PPE is not addressed by any of the co-workers.

Optimism Bias: This bias makes you believe that you are less likely to have an accident than others because you are better and luckier than your peers.

Overconfidence: This is when people believe they are smarter and more capable than they really are and fail to recognize their own limitations and incompetence.

Avoiding cognitive biases

How do you know you are influenced by cognitive biases? Here are some signs:

• you only pay attention to news that confirms your opinions,
• in social media, you only have people in your friend list who think like you,
• you consider that the success of others is due to luck, and your achievements are due exclusively to your work and intelligence,
• when things don’t go your way, you blame others,
• you assume that most people around you share your beliefs or opinions.

What can we do?

Whenever we have an important decision to make, it helps if:

• we identify the factors that influence risk-related decisions
• we become aware of how cognitive biases influence our thinking
• we stop making judgments automatically
• before asking for opinions from others, we analyze situation ourselves
• we develop our critical thinking
• we intentionally reduce dangerous behaviors that may cause accidents.

I hope that this text will help you to make better decisions every time when there is an important stake in your life or you will find yourself in the situation of doing something risky.

by Decebal Leonard Marin

In the projects that I have carried out in the last decade for production companies in Romania, I have frequently encountered the situation where, from a legal point of view, the companies are 100% in order with all the documents. Despite all this, accidents happen with an alarming and unacceptable frequency, and as can be guessed, most of them are not reported.

by Decebal Leonard Marin

I’ve been wanting to write this list for a long time. Its content reflects the experience of safety improvement programs, implemented in various international companies operating in Romania.

by Decebal Leonard Marin

There are two types of problems: “tame problems” and “wicked problems”. Understanding the difference between them helps us to adjust our behavior and choose the right approach.

One of the biggest challenges of the moment is adapting to the hybrid way of working: the combination of remote work and office work.

by Manu

You cannot underestimate the role of the people in defining the company culture. But how much of a company culture depends on certain people? How much Steve Jobs is in Apple? How much Elon Musk is in Tesla? If this is mostly undeniable when it comes to such iconic leaders, what about the role of “normal” people in defining and creating company culture around them? How much of your company is you?

de Decebal Leonard Marin

The mere existence of dedicated legislation, standards and management systems does not ensure a safe working environment.

There is a new trend in organisations to use coaching as a managerial tool. Some managers, tend to attend coaching trainings and seminars and starting using “coaching” with the direct reports. I even heard one manager telling one of the reports “you have just been coached”. Sometimes people we work with do not behave or achieve as expected and managers believe that coaching might help. Well…

Even if sometimes looks so, coaching is not a tool to trick someone to do things that you as a manager should ask from the person. It is not a tool to influence people. It is a great way to be helpful.

Coaching is a great tool to accomplish objectives in life and in the organisation, but in my opinion, it requires some conditions to be met.

Sometimes you are part of the problem

Coaching is an excellent problem solving tool. But there are times when the problem you are trying to solve is not your employee problem but your problem and actually you are trying to solve your problem through him. I even met situations when the employee behaviour was in fact generated by the manager. It is obvious that coaching any other person that the person that in fact created the problem is loss of time and resources.

You are not creating a new perspective

One of the most important coaching objectives (imho) is to at least create a new perspective to the client. As managers we use to tell people everything. More than that we use to explain them our “vision” even when is not the case to do so.

Of course is not coach perspective, but a coach can get you there. I noticed that most of the managers are not able to create new perspectives because that they are biased by their objectives and their formal relationship to the client (client is the person that is coached in coaching language).

You think you know better

Sometimes your formal managerial perspective make you think that you already know better what your employee should do and how. And this is killing the coaching process. Knowing better can make you a good consultant, but an awful coach

Maybe you are not there for the person

A coach should be a person that is there for you, to help you get hat you want to achieve. Most of the so called coaching sessions initiated by the managers are taking place with the purpose of making someone to embrace a company objective (or more). Unfortunately company objectives do not align with employee personal objectives which bring us back to first paragraph. This means that you are initiating the coaching for you or for the company, but not for the person. I am sorry to tell you, but it might not work.

What to do?

Of course it is something to do as a manager.

1. Don’t be coach when you cannot be
2. Help your report understand how achieving company objectives might help her
3. Explain your point of view
4. Get an external coach (it can be someone from another department if you cannot afford an external coach) and be ready to let the things happen maybe in a different manner than you expected
5. Be a better manager
6. Be a better leader

by Manu

Am I a tool? Is my work a tool? Have you ever thought? Maybe one day, your work will be a computer job. It happened before and it will happen again in the future. What makes your work so special? What makes you so special? And what can keep your work in your hands? What if your work is designed as a tool? To answer that you should understand first if your job si a tool. This is not an article where I am gonna say that creativity is important. We all know it is. Let’s see what is this about!

Will the robots take my job?

I had this training once at a large telecom company. It was a briliant training group, very active and very smart. We spoke about process automation. They asked plenty of questions and we had great discussions about purpose of life.

Then comes a very passionate guy who just asked me straight: “Do you think that the robots will take your job?” “Hmm,… I don’t know! Maybe one day…” I said. “Let’s check!” he said. And we opened a browser and went to https://willrobotstakemyjob.com/. Then he said: “You might be lucky. There is less than 2% chance that a robot will do your job in the next two decades”. It made think: “What makes a job “vulnerable” to computers? How can my job be automated?” Of course, I did not have the answers on the spot.

But it made me realise that once there is a process in your job that can be automated, it will be. Even if there is a difficult one. But what makes a job “automatable” ?

Fast Forward Two Years

Here comes 2020. Together with the Covid-19 pandemic. Our core business is face-to-face training, a business that at least in our case, did not show any signs to slow down before March 2020. But the lockdowns hit our business hard. We grew as a local company, focusing on Romanian language trainings with a classic business model. Out of our turnover, face-to-face training holds a 93% stake.

Then comes the lockdown. In Romania, as in many other places, lockdown forbid us to provide face-to-face training seminars. We are suddenly out of business. It takes 4 long months to adapt our business model to on-line business that allows us to make some money again. The take here is that sometimes automation might not be the issue. The issue might be a wrong business model for the business environment. Instead of being hit by the automation trends we are hit by our business model. I don’t know which one is worse. Anyways!

What about AI?

Let’s have a chat about AI. I am not an AI specialist, but I understand how AI works. And I am sure that in the next few years AI will become a big part of our life as the phones are. I don’t wanna jinx it, but AI will probably majorly affect the way we do business. But I was never afraid of AI. Maybe I am naive, but to me AI is something that can help me get rid of the boring works that sometimes I need to do.

For example reports. I don’t like reporting and writing reports. Therefore AI can do that for me one day.

Then I had a discussion with my brother. My brother is a brilliant person. He is one of the most inteligent people I know. He made a great career with his ability of writing reports and proposals. In other words, my brother has the skills and knowledge to write amazing reports. And then he is telling me about an application that allows people with almost no writing skills to write good. “Maybe one day, it will be able to write better than me”.

This discussion make me realise that my amazing brother perceives AI as a competition to his skills, in stead of a tool that allows him to spend less time in making… reports for instance. I managed to shift his paradigm and now he sees AI as a power-up .

What is that?

This is something that makes me understant, that like my brother there are many people out there that think that AI will take their job, like that guy told me few years ago. And maybe it will. But…

Another example: Before computers, in the accounting departments, there were people that use to write down the accounting postings in the ledger. That work no longer exists, because we do everything with the help of computers. Is this something bad? Maybe at that moment, some people lost their jobs, but only for few months until they learned how to use accounting software and were able to ask for better salaries. It was because their job was just a tool for the chief accountant. And a better, cheaper and faster tool came by to replace it.

Since industrial revolution, every now and then, a new technology shows up and replaces the tool-like jobs. Same happens with processes. If your job can be replaced by a process, then a “tool” will replace-it one day. If there is an algorithm, will be a replacement. We designed tools since stone age. People are tool making animals. But some jobs are not like that.

Are you a tool?

Check the jobs around you. You will notice that many jobs are designed like tools for somebody else. Take an assistant for example. An assistant is most of the cases nothing else but a tool for the person he assists. And there are many examples. Take a driver, a nurse, a delivery boy, a cashier and so on. I notice that there are plenty of jobs that are designed as tools.

We design tool-like jobs and we put people on these jobs. Sometimes we call them careers, but in fact they are designed as tools in a process. There is always a better tool waiting to be discovered. The humanity made better tools since forever.

I believe that there are tools-design jobs and human-design jobs.

Maybe is the culture?

This doesn’t happen because of the people, but because of the managers that treat people as tools. We design “perfect” processes where people do not need to use their decision making and creative abilities. Even when decisions need to be taken, we design procedures to ensure that “the right decision” will be made. Like perfectly tuned tools.

Treating people like tools it’s a cultural thing. I can see this in many companies. And of course this exposes people to a so called “better tool”. Because they perform tool-like designed jobs.

To build a “human-designed jobs company”, will be difficult because is a paradigm change and a shift in business ethics. I am sure that some companies will do it, beyond the philosophical concepts that I am talking about. How to do it? I will get back to you in a different article.

How is your business model working with your culture to embrace the AI revolution? How will you grow employees to work with the tools instead of becoming one? I dream of plenty of international companies with few hundred employees and worldwide operations. I dream of a huge diversity and fierce competition.

Wanna ask some questions? Do it here.

Cheers!