What are cognitive biases?

Cognitive bias is the generic term for sys­tem­at­ic errors made with regards to thought processes and per­cep­tion which influence people’s decisions. Our per­cep­tion, thoughts, judge­ments, and memories are always being sub­con­sciously in­flu­enced by our own pre­con­cep­tions. The number of cognitive biases you have to deal with increases when you have to react quickly, when you are presented with too much in­form­a­tion at once or when you have too little in­form­a­tion. Memories are es­pe­cially sus­cept­ible since they are stored and recalled dy­nam­ic­ally: each time you recall a memory, it will be altered.

Every time you make a decision about a product and thus show a pref­er­ence for one brand over another competing brand, you have fallen victim to at least one cognitive bias. Even though we often wish to act ra­tion­ally, sub­con­scious forces are always guiding our decisions. This is not ne­ces­sar­ily a bad thing.

When a company’s man­age­ment learns about the various cognitive biases that exist, they can make use of this knowledge – either directly in managing the company and its employees or in marketing. Market research and sales psy­cho­logy can be put to better use if you have some insight into the human mind’s sub­con­scious.

The following com­pil­a­tion of subjects and examples covers all types of cognitive biases that are relevant for companies. We focused on practical ap­plic­a­tions and only briefly touched on psy­cho­lo­gic­al theories.

When making decisions, people are always in­flu­enced by en­vir­on­ment­al factors. One example of the anchoring effect is when you combine making guesses with a pre­vi­ously spun wheel of fortune. The numbers from the previous spin of the wheel influence sub­sequent guesses even though there is no con­tex­tu­al re­la­tion­ship between the two. Each of our guesses is thus in­flu­enced by the anchoring effect.

A great deal of people rely on leaders to guide them in their decision-making. When it comes to pur­chas­ing decisions, people are quick to behave as followers, choosing the product that many others have already bought. There are numerous examples of the bandwagon effect, and not just in marketing. This cognitive bias in­flu­ences both pur­chas­ing decisions and political choices.

People want to be validated – both in terms of their opinions and their memories. This leads us to accepting our current hy­po­theses rather than ques­tion­ing them when we receive con­flict­ing data. Con­firm­a­tion bias has far-reaching con­sequences and thus plays a major role in pur­chas­ing decisions. People like to choose the product that supports their con­vic­tions.

The decoy effect functions based on the fact that at least 85 percent of all pur­chas­ing decisions are made sub­con­sciously. By spe­cific­ally present­ing a product that is asym­met­ric­ally dominated due to its char­ac­ter­ist­ics, the seller can redirect the pur­chas­ing decision towards the offer they prefer. This decoy usually has a poor balance between its price and per­form­ance, and serves to make the actual target product look better.

Ownership increases the value of a product. The same item is valued dif­fer­ently depending on whether or not you already own it. You can find common examples of the endowment effect in all trans­ac­tions. There seem to be both economic and psy­cho­lo­gic­al reasons for why a seller’s idea of what a price should be would be higher than the buyer’s.

People tend to attribute positive qualities to people or objects that they find fa­vour­able in other aspects. They attribute char­ac­ter­ist­ics to them without any proof which they may have seen in another pos­it­ively regarded context. The halo effect causes you to see objects or people in a better light than they might actually be. From a marketing per­spect­ive, this demon­strates the im­port­ance of the old adage: “You never get a second chance to make a first im­pres­sion.” If a brand makes a good im­pres­sion, consumers will also attribute other positive qualities to it.

Due to people’s memory being malleable and the fact that it is sub­con­sciously altered every time it is recalled or stored without a person noticing, hindsight bias is a fre­quently occurring cognitive bias. Hindsight bias tricks us into believing that we saw an event coming after the fact when, in reality, that was not the case at all.

People who invest time and energy in a product tend to value it more. As proven by the DIY concept used by the furniture retailer that this effect is named after, being involved in the pro­duc­tion of an object increases its perceived value. The IKEA effect is not limited to DIY furniture. It also often manifests when consumers can at least partially help design an item. This cognitive bias is also prominent in the food and fashion in­dus­tries.

People place higher value on losses than cor­res­pond­ing gains. Thus, it is crucial to consider loss aversion in marketing. This cognitive bias can be observed in all cases where there is a sense of un­cer­tainty. There are probably evol­u­tion­ary psy­cho­lo­gic­al reasons for this seemingly over­cau­tious avoidance of losses.

Selection bias is a stat­ist­ic­al bias that describes an error made when col­lect­ing samples. Instead of choosing test subjects at random, there is already a sub­con­scious bias at work in the selection of the par­ti­cipants for a study. Since this bias cannot be avoided, you need to account for the error in your analyses. For example, if you are aware of selection bias, market research can deliver better results.

If analyses of problems are based on erroneous found­a­tions, they cannot provide helpful results. Sur­viv­or­ship bias describes the effect of focusing on suc­cess­ful cases and not on those with prob­lem­at­ic results. This has a major impact on customer sat­is­fac­tion surveys since former consumers do not get a chance to respond. Therefore, it will not be possible to obtain accurate results.