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3+1 Cognitive Traps In Information-laden Decisions
The #1 root of issues with work quality in the services industry is lack of professional skepticism.
The word skepticism is derived from the Greek word “skeptikos” which means to “think or reflect”. And the way we reflect is riddled with biases and heuristics, mental models and social influences.
The old way was to turn a blind eye to these cognitive traps and ignore them. With some catastrophic results, including the 2008 financial crisis originating from an overload of subprime mortgages and collapse of companies.
Fortunately, modern regulators and industry professionals are waking up to the fact that working with our cognitive limitations is better, safer than ignoring them.
Service professionals whose everyday work is based on sorting through information, such as business analysts, financial analysts, auditors, journalists, researchers or basketball scouters, are liable to three key cognitive traps more than other professionals.
This is because “information” is neither always objective nor equally available. So it is up to the judgment of the professional which pieces of information to rely on and to what extent.
In this guide, we walk through these three key cognitive traps with specific examples. And then we present a list of practical, actionable ways to combat them. A list of tactics for you to adopt and adapt to your own context. At three levels, depending on your locus of control: individual, team, organization.
The 3+1 cognitive traps in information-laden decisions
The 3 eminent cognitive traps that deteriorate professional skepticism in daily work are:
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Confirmation bias
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Anchoring effect
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Availability heuristic
Let’s look at these through the eyes of an auditor, a characteristic example of a professional whose everyday work is largely based on information-laden decisions.
Confirmation bias:
The tendency to seek out and give greater weight to information that agrees with your preconceived beliefs and positions, and to avoid information that contradicts them.
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Example: For an auditor, this tendency may mean only seeking evidence that is consistent with a supervisor’s or client’s explanation for an unusual pattern in the financial data.
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Example: It can also mean placing disproportionate weight on audit evidence that is consistent with a preferred outcome.
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An example of a question which displays the confirmation bias is ‘Can you confirm that the debtor’s balances have been correctly recorded?’ This question indicates that other alternatives have not been considered, such as the risk that management has overstated the debtors balance to inflate their revenue position in order to meet their profit (and bonus) targets.
Anchoring effect:
Giving disproportionate weight to one piece of information (usually the first one that you see) at the expense of useful, subsequent information. It translates into having a fixed starting point (anchor) for a reasoning process and being too reluctant to move far from that, even in light of new information obtained.
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Example: If the auditor has audited the entity in previous years, the auditor may be anchored
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to prior year balances.
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Example: Even if the auditor has no prior experience with an entity, they may begin the audit by considering the account details from the previous year, or by examining unaudited balances. In this case, it would be very easy to get inappropriately influenced by these starting numbers, or fail to sufficiently adjust away from an initial starting point. This could result in a lack of objectivity in assessing transactions, estimates, and account balances.
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An example of a question often used by auditors which uses anchoring is ‘Could you please tell me why revenue has increased from last year?’ The starting assumption here is that the company would earn the same amount of revenue each year and that additional factors, such as external trading conditions, would not have changed the earnings pattern.
Availability heuristic:
The mental shortcut where our brains only consider information that is readily available or that easily comes to mind - usually because it is more recent or more memorable. The availability heuristic limits the information gathered and the alternatives considered to those that readily come to mind without much effort.
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Example: As auditors typically work with several clients, information from recent events and audits are likely to be fresh in mind, and they may unconsciously apply less relevant information or conclusions from prior situations to the current audit.
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Example: In a brainstorming meeting an auditor may place high importance on situations that they have recently seen (or read about).
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An example of a question often used by auditors which demonstrates the availability bias is: ‘I know last year you capitalized your website costs, as you were developing a sales component to your website. Is that the reason you have capitalized website costs this year as well?’
Blind-spot bias
Adding to these three cognitive traps is blind-spot bias: the view that ‘everyone is biased except for me’. This can affect an individual’s susceptibility to other forms of cognitive bias, accentuating their effects.
As can be surmised from the explanations, these cognitive traps can occur in conjunction, reinforcing each other.
Limited time and resources also exacerbate the likelihood of falling into these cognitive traps as, by their nature, they act as mental shortcuts to help us save time. The reality of modern business life consists of pressing deadlines, work overload and working on multiple projects at once.
In this modern environment how can we safeguard professional skepticism from cognitive traps?
Even if you cannot eradicate the distortions ingrained into the way your mind works, you can build tests and disciplines into your decision-making process that can uncover errors in thinking before they become errors in judgment.
Here's the free guide: Build Your Acumen for Information-laden Decisions.
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