Decisions, Decisions: Cognitive Bias in Individuals, Groups and Organizations

By John Kellamis | Sep 15, 2016
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Various internet sources claim that adults make an average of 35,000 decisions each day. While that total may be in dispute, it highlights the constant activity our brains are in deciding on matters both inconsequential and life changing. How our brains decide is the subject of numerous studies, and they highlight ways in which we can improve decision making for ourselves, groups and the organizations we work. It seems like a lot to make 35,000 decisions in one day, but from my experience, I would double it for an electrical contractor.

Individual decisions

Cognitive biases are tendencies our brains have in making decisions for certain situations. In the workplace they can lead to a detrimental effect on your bottom line. They include anchoring bias, overconfidence, confirmation bias, and the sunk-cost effect.

When you formulate an estimate, do you ever alter your number based on the budget number? Do you think the person who formulated that number took the same amount of time and effort you did to produce yours? This is an example of an anchoring bias whereby your judgement of value has been altered by an initial estimate of the cost. The use of an anchoring point is paramount during negotiations, and it will subconsciously affect all that follows. Watch an episode of Pawn Stars, and notice how the sellers' initial estimates outside of the store lower when the owners chime in. This happens with you as well, and you should learn to recognize when the anchoring bias is at play.

Overconfidence affects many of our decisions, but it is most noticeable in construction. Contracting is largely a confidence game, and many assume the more confidence the better. The problem lies with the brain’s tendency to assume success, given examples of past success, regardless of the present situation. How much harder is an eight-story building to build when you have had success building three-story buildings? Your answer should be a little harder, but a good result on several smaller buildings may leave you overconfident in your abilities on a dissimilar project. This can also occur when accepting a project for a value much higher than you have completed before. There are many other factors that affect these sorts of decisions, but the most common advice is to turn important decisions into rational exercises, writing down the pros and cons for each circumstance, and leaving your emotions at the door.

When you seek out advice on a decision and only tend to get information that supports your decision, you are falling prey to confirmation bias. Finding honest advice can be hard, especially if you ask people in a way that inclines them to agree with you. They may see that you are really enthused about an opportunity in the marketplace and do not want to discourage you. This is worse than getting no advice at all. For matters dealing with your business, the most helpful candidates would be others in your industry, but asking your competition about local opportunities does not seem wise. Organizations such as the National Electrical Contractors Association can help with their vast sources of information and peer groups.

The sunk-cost effect is the classic example of throwing good money after bad. By increasing investment on a failing project simply because you have invested substantial resources there before, you fall victim to this trap. Have you ever completed the shell of a building along with several suite buildouts to discover the project is not covering its share of the overhead only to bid future buildouts at the same estimate levels, and financial results? Is it pride, the desire to keep the competition out of “your” building, or the sunk-cost effect? Honestly, it is a combination of all three. Recognition of the sunk-cost effect usually happens long after the money is buried in the hole.

With all of these factors influencing your business decisions, how do you counter their effects? As stated previously, separating yourself from your decision and seeking impartial advice will help. Noting the outside influences affecting your thoughts will aid you as well. One of the lesser studied, but most widely used, methods is intuition. There is much to be said about one’s gut feel. The more years you have on the job, the more you feel, and this is precisely the point. Intuition cannot be taught, but through careful observation over time, you can learn to recognize the telltale signs that will assist you in making decisions on the job site or in the office.

Our former office manager could look at the size of a job folder, noting how many material orders had been made and their size on a job site, and determine if the job was a loser. She felt frequent small orders characterized a foreman who did not plan out the work very well and made for an unorganized job and lost profit. She was right most of the time. Similarly, have you ever gone on a job site and felt that the pace was a little to frantic, making you uneasy and indicating that an accident was a distinct possibility? Intuition comes with experience, but I would certainly not discount it in assisting with your decisions.

Group decisions

If individuals struggle with the cognitive biases mentioned, then surely groups of individuals should make better decisions based on a pooling of opinions. Sadly, this is not always the case. Groupthink, a term first coined by William Wyte, Jr., refers to the desire of a group of people making a decision for conformity, even if the decision is irrational. It is human nature to conform, but this is a problem when all angles of a problem need to be looked at to make the best decision.

When faced with an opportunity that requires multiple people to decide, it is best to set up the decision making process to give equal representation to all sides of the issue. Even if everyone is in favor of going after the project, entering a new market or acquiring a competitor, have someone in the group take the opposite side, a devil’s advocate stance. One skill that our society is losing in its ever-polarizing viewpoints on issues is the ability to take an honest look at all sides of an issue. Members of a high school debate team are required to prepare for and defend both the pro and con sides of their topics, and it is good practice. You can still be firm in your convictions, but investigation into a contrary opinion will either make you think twice or become stronger in your decision. Both are a good thing.

Organizational decisions

If groups make better decisions than individuals, organizational decision making should be flawless. Unfortunately, many of the cognitive biases present in individuals simply become manifest in the organizations comprised of these same people. Many scholarly papers have been written on the failures of large organizations, such as NASA, when poor decisions have led to the loss of life. Patterns of behavior have been found in these organizations that lead to such tragedies. One example of such ingrained flawed decision making is the "normalization of deviance."

Diane Vaughn, in her study of the Challenger space shuttle disaster, described the normalization of deviance. While NASA is one of the most cautious organizations on the planet, the pattern of launching the space shuttle on cold mornings had become commonplace, even though warnings were made that the O-rings would erode and fail at such low temperatures. Overconfidence played a part, but it was this acceptance of a dangerous situation, one that had never led to tragedy before, that became acceptable behavior prior to the launch of a shuttle.

The normalization of deviance occurs on nearly every job site in the country, at least the ones without a safety officer overlooking each worker. Performing tasks unsafely year after year becomes habit and hard to change. Warnings and fines will do nothing to reduce accidents without a commitment from everyone in an organization to become safer. NASA changed their culture, and this lesson should not be lost on your firm. The poorest decision from the newest worker will lead to tragedy eventually, unless every worker buys in to a culture of safety.

Cognitive biases exist in individuals, groups and organizations. The problems only get more complex with the size of the group, yet the solutions are similar for all concerned. A rational approach to decision making, with an eye to recognize these biases, will set the process up correctly. Inspire a conflicting side to debate the decision if it involves a group. In organizations, cultivate a culture of sound decision making, and your results should improve. Out of the thousands of decisions you make each day, any assistance is welcome.

About The Author

John Kellamis, is Vice President of Lake Erie Electric, Inc., and manages their office in Akron, Ohio.  He has over thirty years of experience in the electrical construction industry and serves as President of the North Central Ohio Chapter of NECA.

He has served as an instructor for the NJATC and is an adjunct professor at Walsh University, teaching classes in statistics, decision modeling, and business strategy.  He also developed and teaches a course in electrical contracting for the Construction Management program at Kent State University.

Contact him at [email protected].





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