Cognitive Bias in Business

💡 Originally introduced by Amos Tversky and Daniel Kahneman in their research paper “Judgment under Uncertainty: Heuristics and Biases”.

Cognitive bias happens when we apply our world view and personal history when processing and interpreting information that impacts the quality of our judgmenent and decisions.

It’s important to be aware of different types of biases, especially when we take on a leadership position, as they may result in negative impacts on the team. When it comes to Scrum Masters in an Agile environment, they need to stay unbiased to be the most effective in their work.

There are four types of cognitive bias:

• Social
• Financial
• Failure to estimate, and
• Short-termism

There is an infographic created by Raconteur that presents a great summary of the different biases. Here I’d like to give you examples of what they may look like when it comes to the work with a product development team.

Cognitive bias	Description	Type	Example
ANCHORING EFFECT	Relying too much on the initial piece of information offered when making decisions	Short-termism	“The Product Owner said that this feature probably won’t have impact on anything else, so we don’t really need to run the end-to-end test”
AVAILABILITY HEURISTIC	Overestimating the importance and likelihood of events given the greater availability of information	Failure to estimate	“Most tech blogs talk about AWS over Google Cloud. This must be a better system to use”
BANDWAGON EFFECT	Believing things more based on the number of people who share that belief	Social	“Everyone on the business team says that there is a problem with our data”
BELIEF BIAS	Basing the strength of an argument on the believability or plausibility of the conclusion	Failure to estimate	“I’m not sure I understood why this solution is better, but it seems right”
BLIND SPOT BIAS	Viewing oneself as less biased than others	Social	“I don’t think that developers really understand the business side because they are too focused on the tech. We should not take their arguments too seriously”
CLUSTERING ILLUSION	Erroneously overestimating the importance of small clusters or patterns in large data	Failure to estimate	“It’s the second sprint in a row where we spend over 50% of our time on fixing bugs. There’s clearly a problem in our testing”
CONFIRMATION BIAS	Focusing on information that only confirms existing preconceptions	Failure to estimate	“Half of the team thinks that there is no problem, so it makes sense to accept that there isn’t one”
COURTESY BIAS	Giving an opinion/conclusion that is viewed as more socially acceptable so as to avoid causing offense/controversy	Social	“Ok, we don’t really have much time going into this right now, so let’s move on”
ENDOWMENT EFFECT	Irrationally overvaluing something you own regardless of its objective market value	Failure to estimate; FInancial	“We’ve already pourred a million dollars into this project. We have to finish it even if the customers don’t ask for it anymore”
GAMBLER’S FALLACY	Believing that future probabilities are altered by past events, when in fact they are unchanged	Failure to estimate	“We tried to resolve this dependency for three sprints now. This time we have much higher chance of doing it”
HYPERBOLIC DISCOUNTING	Preferring a smaller, sooner payoff over a larger, later reward	Financial, Short-termism	“We don’t have time to automate these tests now, we need to get this released asap”
ILLUSION OF VALIDITY	Overestimating oneself’s ability to interpret and predict accurately the outcome when analyzing a set of data	Short-termism	“I don’t know what the problem is, but I’m pretty sure that this bug fix won’t take me more than 1 day of work”
OSTRICH EFFECT	Avoiding negative financial information by pretending it doesn’t exist	Financial, Failure to estimate	“Let’s not look at the burndown charts as this sprint was a bit off. We’ll review once we have done more progress”
POST-PURCHASE RATIONALISATION	Persuading yourself that a purchase was the right decision	Financial, Failure to estimate	“This new platform was definitely worth the money we invested it in”
REACTIVE DEVALUATION	Devaluing an idea because it originated from an adversary or opponent	Social	“The marketing team is only receiving this award because their manager is friends with the VP”
RISK COMPENSATION	Taking bigger risks when perceived safety inscreases, being more careful when perceived risks increases	Failure to estimate	“With the new DevOps engineer on board we can make some exceptions for our testing since it’ll be covered later”
STATUS QUO BIAS	Preferring the current state of affairs over change	Short-termism	“Our product works just fine. Why do we need to upgrade the UI and the platform now?”
STEREOTYPING	Assuming a person has characteristics because they are a member of a group	Social	“All developers I worked with always over-complicate things. I don’t think it’s that difficult as they make it too be”