Cognitive biases affect everyone.
The human brain is the epicentre of what we value, why we behave the way we do and how we make decisions. But the brain operates on circuitry with a limited processing capacity. As a result, we rely on mental shortcuts to navigate everyday life.
By recognising and anticipating cognitive biases through the application of behavioural economics, government agencies and organisations can design targeted interventions that nudge people toward better actions and behaviours.
Explore the following selection of cognitive biases to better understand how they can have a profound effect on citizen and customer decisions:
Overconfidence bias
Do you consider yourself an above-average driver?
Choose one from the above to learn more about this bias and where you stand.
This is an example of overconfidence bias
It turns out, you’re among 90% of people who consider themselves above-average drivers—and it can’t be true of all of them. In business, this bias can affect decision making and hinder learning potential. For example, overconfident CEOs are 65% more likely to complete an acquisition, and they overestimate revenue synergies in 70% of cases. But in more than 70% of cases, acquisitions fail.
But 90% of people say they’re above-average drivers
Another example of the overconfidence bias is the expectation you’ll finish a project within a certain period of time—only to find yourself cramming in the final hours. In business, this bias can affect decision making and hinder learning potential. For example, overconfident CEOs are 65% more likely to complete an acquisition, and they overestimate revenue synergies in 70% of cases. And typically, more than 70% of acquisitions fail.
Sunk cost fallacy
Have you ever sat through a movie you didn’t like?
Or have you ever eaten a meal at a restaurant even if your food was too salty? Choose one from the above to learn more about this bias and where you stand.
The more we invest in something the harder it is to abandon
Sometimes described as “throwing good money after bad,” the sunk cost bias can take many forms. In business, this makes it hard to adapt to change and plan for the future with confidence. For example, an organisation that’s invested a lot of time and money in an inefficient technology system is less likely to try to find a better solution.
But be aware that the sunk cost fallacy takes many forms
Sometimes described as “throwing good money after bad,” this bias is a gap in reasoning where the more one puts into something the harder it is to abandon it. In business, this makes it hard to adapt to change and plan for the future with confidence. For example, executives who have initiated an internal procurement process in the past are less likely to outsource, even if their internal teams are less capable of delivering a satisfactory solution.
Present bias
Do you use mobile data after you’ve hit your plan’s limit?
Choose one from the above to learn more about this bias and where you stand.
This is an example of present bias
As humans, we tend to overvalue immediate rewards over long-term ones, and this can have small or significant implications in business and life. For example, making participation in an employee retirement saving plan the default increased the plan’s enrolment from 49% to 86%. Without the defaults, 37% weren’t saving for retirement using their employer’s plan.
It seems you’d rather save for later than spend today
In many cases, people tend to overvalue immediate rewards over long-term ones. The present bias also takes other forms—including ABM fees and impulse credit-card purchases—and can have small or significant implications in business and life. For example, making participation in an employee retirement saving plan the default increased the plan’s enrolment from 49% to 86%. Without the defaults, 37% weren’t saving for retirement using their employer’s plan.
Anchoring bias
Do you pay the minimum or the full amount on your credit card bills?
Choose one from the above to learn more about this bias and where you stand.
Like you, people tend to pay only the minimum if it’s given
People tend to rely too heavily on first impressions when making decisions. This includes using the “minimum due” as a baseline, or “anchor,” when paying bills. But when no minimum is given, there’s a 70% boost in average payment. Business leaders must be aware of this anchoring bias to make informed decisions and better present solutions to customers and employees. For example, in human resources, it’s been shown that more than 4 in 10 employees put in less effort as they approach their bonus caps.
People tend to pay more if no minimum value is given
People tend to rely too heavily on first impressions when making decisions. In this case, people tend to pay the “minimum due” when it comes to bills. But there’s a 70% boost in average payment value when no minimum is given. Business leaders must be aware of this anchoring bias to make informed decisions and better present solutions to customers and employees. For example, in human resources, it’s been shown that more than 4 in 10 employees put in less effort as they approach their bonus caps.
We help policymakers and businesses move ahead boldly by recognising the cognitive biases that affect Australia’s citizens and customers.
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