Can companies have cognitive biases?

Why companies seem good at some decisions and bad at others

Humans have something called cognitive bias. It can be loosely defined as our inclination to take shortcuts to arrive at a solution quickly, when they may not hold up to true rational scrutiny. An example of this would be our tendency to judge someone by appearance although we know nothing about them or even our inability to determine relative values of competing supermarket offers (50% off or buy 1 get 2?).

There is a cause for this. Thinking is an expensive process and natural selection favors those who think quickly, even though more error-prone, than those who think methodically and take more time. Evolution favors those who might spot movement in the bushes, assumes a tiger is approaching, and run away to those who instead approach the bushes to confirm whether it was really a tiger. Solving problems quickly has necessitated a totally different cognitive pathway than normal, rational thinking.

The Concept of Cognition for Companies

Cognition refers to :

”the mental process by which external or internal input is transformed, reduced, elaborated, stored, recovered, and used. As such, it involves a variety of functions such as perception, attention, memory coding, retention, and recall, decision making, reasoning, problem-solving, imaging, planning and executing actions.” (Neisser, 1967).

This act of receiving external and internal input to drive decision-making and problem-solving is not only a characteristic of humans, but companies as well. They would gather data about the market, the industry, their customer, etc and then make decisions on what to do in order to provide more value to their customers.

Companies arrange these cognitive processes to work by building their organizational structure around it. According to what factors more greatly affects their business, the structure will reflect that. Industrial companies understandably will have a greater part of their organization devoted to factory management, companies with strict regulatory requirements such as oil and gas or pharmaceuticals might make a lot of structure on compliance. With time, these organizational focus becomes more and more pronounced as companies are mandated by their shareholders to concentrate more on their key strengths. These departments hold more and more influence in the decision-making process of these companies and as such their decisions are increasingly colored by these departments frame of thinking.

Cognitive Bias in Companies

Google built their fortune on a sophisticated search engine that was miles ahead of the competition. Because of these success Google has built a bias on engineering. They hire a lot of Phds and extremely proficient engineering talent. Their successes have been those products that rely mostly on great scientific and engineering work such as AI, Cloud technologies, and Deep Learning whereas their failures (google+, allo, hangouts) do not require godlike engineering talent but do require insight on what users need, what do they value in such products. The problem might be that they are not structured for that kind of decision-making and as such cannot make great decisions on that domain.

So these biases are learned and dependant on the company’s own history and achievements. As long as the environment and markets in which the company operates stays relatively the same throughout its lifetime, then these biases become evolutionary advantages that can help the company become more successful. Yet as we know markets and environments change all the time — we speak of disruptors which can upend entire industries and render even past titans irrelevant. These companies fail exactly because the structure that has been serving them well so far are not doing so well anymore.

How to Minimize Cognitive Bias in Companies

There are ways to minimize the effect of cognitive bias in companies. Some examples I can think of:

1. Gather as much data as possible

As a well-traveled person is less likely to fall into stereotypical prejudice, the more data a company gathers about its environments the more likely that it will spot changes and react accordingly. The more decisions are based on data the less they are based on ingrained biases or power structures. Note that the decision on what set of data to gather can also be outdated so evaluate it periodically.

2. Do not get stuck on a narrow view of the business

Is Domino’s in the restaurant business or in the pizza serving business? Is Ford in the automobile business or in the personal transportation business? IBM once believed it is on the PC production business and it has since learned that it is better to position itself in the enterprise services business. The kind of business a company believes it is in determines the structure that is created around it. Therefore it is important not to get stuck in narrow definitions that may not be resistant to change.

3. Periodically evaluate authority and responsibilities

The division of responsibility and authority in a company are based on the assumptions of a business model and strategy. If the business model and strategy changes then the division of responsibility and authority necessarily also change. By continuously evaluating this we can prevent the formation of a self-serving bureaucracy that exists merely to preserve itself within the company.

I believe cognitive bias in companies is a real problem and none of the companies I’ve worked at are free from it. Some companies seem to survive this due to ingrained competitive advantages (sheer size, economies of scale, regulatory capture, or possession of unique assets) but no company can continually make bad decisions that are irrelevant to the changing environments and last.