5.4 Cognitive biases

Question 1

The FRC Guidance on Board Effectiveness recognises that the most compleex decisions rely on j________ but the decisions of the most well meaning and experienced leaders can sometimes become d______.

Answer 1

judgement

distorted

Question 2

As both individuals and groups, we are evolved to be b________. This is a significant issue for b____.

Answer 2

biased

boards

Question 3

Manet (2010) investigated the impact of biases on board rooms and found that:

• bias is i__________ and often u__________
• bias plays a significant role in board decision making
• bias undermines the benefits of i________ directors
• governance r_______ needs to emphasise the effects of bias.

Answer 3

inevitable
underestimated
independent
regulation

Question 4

Who investigated the impact of biases on board rooms (2010)?

Answer 4

Oliver Manet (2010)

Question 5

What is Sytem One and System Two thinking when considering biases?

Answer 5

System One thinking is low, effort, unconscious thinking (e.g. brushing teeth, driving common route)

System Two thinking is slow, effortful, conscious and deliberate (e.g. learning a new skill).

Question 6

Cross identifies a number of common biases in boardrooms.

What bias represents the overriding desire for concencus and unanimity, leading to suppression of dissent?

Answer 6

Groupthink

Question 7

Cross identifies a number of common biases in boardrooms.

What bias represents our tendency to interpret and search for information consistent with our prior beliefs, discounting contrary advice?

Answer 7

Confirmation bias

Question 8

Cross identifies a number of common biases in boardrooms.

What bias represents our tendency to rely to heabily onone trait or piece of information, usually the first one presented to us?

Answer 8

Anchoring bias

Question 9

Cross identifies a number of common biases in boardrooms.

What bias represents our tendency to see past events as being more predicatable than they were before the event occured, and therefore believe that future events are more predicatable than they actually are?

Answer 9

Hindsight bias

Question 10

Cross identifies a number of common biases in boardrooms.

What bias represents our tendency to make decisions infuenced by events or experiences that immediately come to mind or are easily accessible?

Answer 10

Availability bias

Question 11

Cross identifies a number of common biases in boardrooms.

What bias represents our tendency to prefer avoiding losses than acquiring gains?

Answer 11

Loss aversion

Question 12

Cross identifies a number of common biases in boardrooms.

What bias represents our tendency to not accept our decisions as wrong and therefore to throw good money after bad?

Answer 12

Sunk cost fallacy

Question 13

Cross identifies a number of common biases in boardrooms.

What bias represents our tendency to draw different conclusions from exactly the same information presented in different ways (e.g an 85% fat free meal versus a 15% fat meal)?

Answer 13

Framing effect

Question 14

Cross identifies a number of common biases in boardrooms.

What bias represents our tendency to believe we are immune from all biases?

Answer 14

Metacognitive bias

Question 15

What is the name of the reference guide for all cognitive biases?

Answer 15

Cognitive Bias Codex

Question 16

Kahneman et al developed a 12 question checklist for quality control in the decision mkaing process. What are te three categories of questions?

Answer 16

1 Ask yourself
2 Ask the recommenders
3 Ask about the proposal

Question 17

The Kahneman et al paper, “Before you make the big decision” sets out 3 questions for boards to ask within Category 1: Ask yourself:

1 Check for s___-i_______ biases (is there overoptimism?)

2 Check for the affect h________ (has the team fallen in love with the proposal?)

3 Check for g_______ (was there dissent among members?)

Answer 17

self-interest
affect heuristic
groupthink

Question 18

The Kahneman et al paper, “Before you make the big decision” sets out 6 questions for boards to ask within Category 2: Ask the reccomenders:

4 Check for s_________ and bias (could the diagnosis be overly influenced by past success?)

5 Check for c_________ bias (are credible alternatives considered?)

6 Check for a__________ bias (what information would you want to make this decision in a year’s time?)

7 Check for a__________ bias (do you know where the numbers came from?)

8 Check the h____ effect ( is the team assuming a solutions successful in one area will automatically work elsewhere?)

9 Check for s____ c____ fallacy (are recommendations overly attached to past decisions?)

Answer 18

salience
confirmation
availability
anchoring
halo
sunk cost

Question 19

The Kahneman et al paper, “Before you make the big decision” sets out 3 questions for boards to ask within Category 3: Ask about the proposal:

10 Check for o___________ (is the base cast overly optimistic?)

11 Check for d______ neglect (is the worst case bad enough?)

12 Check for loss a______ (is the reccomendation overly cautious?)

Answer 19

overconfidence
disaster
aversion

Question 20

The FRC lists a number of steps as summarised by Brendan (2013) for minimising biases in decision making. List 5 of these.

Answer 20

Executives should put their case forawrd earlier, giving time to share concerns.

Inform boards of the processes used to arrive at proposals.

Commission independent reviews of proposals.

Seek expert advice

Take large decisions in stages

Introduces processes for reflection

Consider whether decisions might be wrong

Allocate different board within roles

Find reasons not to agree

Deliberately introduce devil’s advocate

Introduce automatic stops in decision making

Record pros and cons in meeting minutes

Remove management more quickly after problems emerge.