Humans, it turns out, are not rational beings. We are prone to emotional, irrational beliefs and biases. Of those, confirmation bias might be one of the most dangerous.
Suppose, for example, that you are a budding entrepreneur and interested in opening an organic coffee shop in Phnom Penh. You look around: many such shops are opening and, from what you have observed, they are rarely empty.
Cambodia also has a young population, and young people like to socialise. There’s a growing middle-class who like coffee shops. There’s rising disposable income, ready to be spent on the latest trend. Your friends all say it is a great idea and, of course, they will drink there every day.
You’ve also done taste tests, and a large number of people say they prefer your brew to ordinary coffee. A good amount say they would also be prepared to pay the extra $2 you are charging – though some pesky samplers say they wouldn’t, because they couldn’t afford it every day. In any case, the stars seem to the aligning that your business will be a success, so you open.
Suppose, then, one year on, and your coffee shop is empty. No one wants to spend the extra cash on organic coffee. You might have to close soon. What has gone wrong? In this hypothetical example, there are many possibilities: a bad choice of location or poor advertising, for instance. But let’s focus on another: your original research was biased.
You wanted to open the coffee shop so much that you only looked at the information that supported the concept – friends’ support, positive taste tests, the simple justification that people like coffee. But you ignored the information that said it was a bad idea: the saturated coffee market, the high cost of your product, the overestimation of people’s spending powers. You were susceptible to ‘confirmation bias’.
When the high priests of free-market economics – Adam Smith, David Ricardo, John Stuart Mill – began positing the foundations of capitalism in the 18th and 19th centuries, they were guided by the belief that people were logical thinkers, who would run economies in equally rational ways. We were not homo sapiens, we were homo economicus – the economic man.
However, according to Richard Thaler, author of Misbehaving: The Making of Behavioural Economics and professor of behavioural science at the University of Chicago, economists “must stop making excuses” and accept the fact that humans are human, fallible and liable to irrational beliefs and biases – one of the most prominent examples being confirmation bias.
It goes something like this: we have an idea, opinion or hunch. We then look for information about it. However, the fallibility of humans means we tend to seek information that supports our belief, whilst at the same time ignoring the information that runs counter to it.
Although the concept has been known for centuries – Greek historian Thucydides wrote in around 400BC that “it is a habit of mankind to entrust to careless hope what they long for, and to use sovereign reason to thrust aside what they do not fancy” – the term was coined by Peter Wason, a cognitive psychologist at University College London, in the 1960s.
A famous test took place a decade later at the University of Minnesota, conducted by psychologists Mark Snyder and Nancy Cantor. They began by creating an imaginary woman called Jane. During the course of Jane’s imagery day, she would do some activities that were introverted, like drinking alone in a coffee shop, and some things that were extroverted, like socialising with friends. The team then asked participants to read Jane’s story and, days later, divided them into two groups. One was asked if Jane would make a good librarian; the other if she would make a good real estate agent.
Synder and Cantor discovered that the group who were asked if Jane would make a good librarian only remembered details about her invented life that meant she was right for the position, which tended to be the introverted moments. The group concentrating on the real estate agent job only recalled events that showed she was extroverted, socially confident and suitable, ignoring the evidence that showed otherwise.
The study not only revealed that people search for information that confirms a certain preconception, but that even memories can fall prey to confirmation bias. This is an example of what psychologists often call ‘selective recall’ – the habit of remembering only facts and experiences that reinforce our assumptions.
Confirmation bias is just one of the numerous inbuilt bugs of the human psyche. Yet, there are ways of moderating it that could be of use in a business environment.
One of the biggest contributors to confirmation bias is said to be the fact that people in decision-making positions often surround themselves with ‘yes-men’ or those who share the same opinions and thoughts. One of the richest men on earth, Warren Buffet, is keenly aware of this.
In 2013, Forbes magazine explored exactly how Buffett attempts to avoid succumbing to confirmation bias, and what this means to financial investors. It warned: “For investors, confirmation bias is particularly dangerous. Once an investor starts to like a company, for example, he may dismiss negative information as irrelevant or inaccurate.” The same can be said for entrepreneurs or any businessperson.
Explaining what it dubbed the ‘Buffett Approach’, Forbes described the 2013 annual general meeting for Berkshire Hathaway, a multinational conglomerate for which Buffett is the chief executive officer. Instead of inviting claquers, who would applaud at whatever Buffett said, he invited Doug Kass, a hedge fund manager and constant critic of Buffett and Berkshire Hathaway, as a guest speaker.
Forbes described this as “largely unprecedented” and applauded Buffett’s simple act of giving “voice to opinions that contradict his own”. Indeed, creating a “culture of challenge” was just one of the suggestions for fighting confirmation bias that was expounded upon in an 2003 article in the McKinsey Quarterly, written by Charles Roxburgh, who was director at McKinsey’s London office at the time.
It advised management teams to value open and constructive criticism. “Criticising a fellow director’s strategy should be seen as a helpful, not a hostile, act. CEOs and strategic advisers should understand criticisms of their strategies, seek contrary views on industry trends, and, if in doubt, take steps to assure themselves that opposing views have been well researched,” Roxburgh wrote.
Another piece of advice is to not ask for “validation of your strategy, [but] ask for a detailed refutation”. So, when setting up a new business plan or strategy, make sure there’s a “challenger team” within the company that works to identify the flaws in the strategy.
Challenging and constantly seeking information that runs counter to your own opinion are, of course, excellent ways of evading the perils of confirmation bias. But, arguably, one of the most important steps is to realise and understand that your beliefs and decision-making abilities are not as rational and impenetrable as you first thought. As the saying goes: the first step to recovery is admitting that you have a problem.