Bias
How Confirmation Bias Reduces Business Profits
Try to prove yourself wrong to avoid this judgment error.
Posted August 16, 2022 Reviewed by Lybi Ma
Key points
- Confirmation bias causes leaders to look for information that confirms their beliefs, and rejecting information that does not.
- To overcome this dangerous cognitive bias, leaders should test decisions by trying to prove themselves wrong.
Have you heard about “Dieselgate?” The German car giant Volkswagen acknowledged in September 2015 that it used cheating software to give false readings when its cars, VW and Audi, underwent emission tests.
The revelation shook up the car industry. It led to the resignation of CEO Martin Winterkorn, and several other top leaders.
Volkswagen’s stock fell more than 40 percent over just a few days. The scandal cost the company over $20 billion.
Of course, the discovery of this falsehood was inevitable. It’s similar to how Enron, WorldCom, or Tyco’s accounting fraud around the turn of the millennium would inevitably be discovered.
Why do so many successful business leaders wear rose-colored glasses that prevent them from seeing obvious points of failure?
And it’s not simply top companies. Smaller versions of the same problem occur every day. Why do most new restaurants fail within three years? It’s not like their owners set out to fail. It’s simply that they didn’t want to acknowledge market realities.
Leaders Struggle Against Confirmation Bias
Staring unpleasant truth in the face challenges our self-identity. Many leaders work very hard to convey an appearance of success to themselves and others.
They reject any sign of having made mistakes. This unwillingness to acknowledge mistakes is an unfortunately all too common quality of leaders who are otherwise excellent.
They are brought down by a series of related mental errors, the most prominent of which is confirmation bias. It involves two parts.
First, we only look for information that confirms pre-existing beliefs. Secondly, we actively ignore any information that contradicts these beliefs, rather than valuing such information especially highly.
Failing to see the truth about reality causes leaders to make decisions that reduce business profits across all business sizes.
A four-year study by LeadershipIQ found that 23 percent of CEOs got fired for refusing to recognize negative facts about the organization’s performance. Other findings show that professionals at all levels suffer from the tendency to deny uncomfortable business facts.
According to investigators who charged former Volkswagen CEO Martin Winterkorn with fraud, he apparently approved the use of the “defeat device” to falsify emissions standards. That’s despite it being clear that, eventually, word would leak and devastate the company’s, and his personal, reputation.
As another example of seeking information that confirms pre-existing beliefs, consider entrepreneurs who start up restaurants. They generally do so without thoroughly analyzing the probabilities of success and typical causes of failure.
Confirmation bias represents one of over 100 fallacious thinking patterns called cognitive biases. These mental blindspots impact all areas of our life, ranging from relationships to health, from politics to shopping. Fortunately, recent research has shown effective and pragmatic strategies to defeat these dangerous judgment errors.
The Key to Combating Confirmation Bias: A Healthy Dose of Reality
It’s very typical for business leaders to look only for information that justifies their business case. Senior executives tend to wax enthusiastically about a proposed acquisition or merger. Yet, rarely mention the all too typical failures of such ventures.
It takes great courage for an organization insider to break the atmosphere of “make nice.” That’s because companies rarely have a culture of healthy disagreement and searching for potential problems.
While this bias is obviously very dangerous in the modern context, it helped facilitate our survival in the savanna. Back then, the truth was much less important than aligning our perceptions of reality with those of our tribe.
We are the descendants of those humans who successfully did so. Naturally, our gut reaction is to be very uncomfortable when facing information that goes against others in our tribe.
What can you do to go against the beliefs of those in your tribe? How can you try to prove yourself and your team wrong, rather than right?
In developing your next business case, make a commitment to proving yourself wrong. You’re much likelier to have a stronger business case if you can’t do so. And if you can prove yourself wrong, you’ll have a chance to back a much better initiative.
Conclusion
Even experienced leaders can fall victim to confirmation bias, our innate tendency to turn a blind eye to flaws in our plans. These disastrous decisions adversely affect both the business and the leader’s personal reputation. To combat this, leaders need to practice scrutinizing decisions to try to prove themselves wrong. This best practice forces leaders to acknowledge the fallibility of their ideas and avoid going with their gut. Instead, they make the wiser, profitable decisions by bravely staring at the truth of reality, no matter how uncomfortable it makes them.
References
What Is the Function of Confirmation Bias? Uwe Peters
Croskerry, P., Singhal, G., & Mamede, S. (2013). Cognitive debiasing 2: impediments to and strategies for change. BMJ quality & safety, 22(Suppl 2), ii65-ii72.
Cantarelli, P., Bellé, N., & Belardinelli, P. (2020). Behavioral public HR: Experimental evidence on cognitive biases and debiasing interventions. Review of Public Personnel Administration, 40(1), 56-81.
Soll, J. B., Milkman, K. L., & Payne, J. W. (2015). A user's guide to debiasing. The Wiley Blackwell handbook of judgment and decision making, 2, 924-951.
