A very colorful component of the Chinese language is what are known as “chengyu” (成語) which are four character maxims that pithily express philosophical, moral and practical insights.  There are thousands of these maxims that can be applied to all types of situations.  

One well known chengyu is “jing di zhi wa” (井底之蛙) which literally means “frog at the bottom of the well.”  This chengyu, which illustrates the story of a frog whose understanding of the world is limited by its narrow view from the well, is meant to serve as an illustration of a person who mistakenly takes a small part of something for a much larger and often very different whole. The frog, in other words, has a major bias problem.

Bias and Decision-Making

The problem of bias, a predisposition to see the world in a particular and limited way, is a major analytical issue for individuals, multinational corporations and governments that often leads to bad decisions and negative and at times disastrous practical consequences.

While there are as many types of bias as there are perspectives, and in fact many perspectives are simply disguised biases, there are several key bias elements.

Outlook Issues 

Human decision making is a complicated process that is driven by a range of shifting and interweaving social, intellectual and emotional factors.

When people make decisions they often base them on a range of criteria, including their age, cultural background and life experiences and realities.  These criteria create a built-in mental framework that affects the types of decisions that are made, when they made, how they are made and even why they are made.

There are a great many outlook biases but one that can have a particularly important impact on decision-making is how one views one’s experiences compared to the experiences of others.

For example, one may assume that “if something is easy for me, it must be easy for everyone else.”  Similarly, depending on the context and one’s own psychological predispositions, one can take the opposite view that “everyone understands this but me.”  Both generalizations, which can have a major impact on how we act as well as how we think, are often wrong and blur together vital gradations of difference.

This also applies to the conclusions that we draw regarding things that are around us.  If we spend a great deal of time in parks where 98% of the birds are pigeons, we might come to the mistaken conclusion that 98% of the world’s birds are also pigeons.

Data Filter Problems 

Many types of decisions are made with reference to some type of external data.  As suggested above, when we review external data for decision-making purposes we do not view it with a clean mental slate but rather through a complicated and often distorting viewing glass. 

This viewing glass can lead us to:

● look for data which confirms our pre-formed outlook and discard data based on different types of justifications which challenges that outlook

● impose correlations or analytical relationships on factors that are not correlated or related or ignore correlations that are valid or

● otherwise manipulate past events or trends into conclusions that are consistent with our perspective or decision-making objectives.

Another data filter problem is related to the fact that data itself is often not neutral but tends to be skewed in some way. For example, when we make a choice about where to go on vacation we often do not make decisions based on our own direct vacation experiences but rather base the decision on information that has been prepared by third parties with their own set of limited data gathering processes and perspectives. This data often reflects unintentional or even intentional biases. 

A great deal of data that is presented to us is provided with the objective of trying to get us to think or act in a certain way.  This is particularly true in marketing, where the information that is presented is not provided with the objective of giving a consumers a balanced view of a product or service that points out its defects but rather to get us to buy the product or service.

Even data that seems to be ostensibly unbiased often has large built in biases in it. Journals, for example, may include articles that express certain types of viewpoints and exclude others.  Even computer-assisted data searches that are based on seemingly disinterested algorithms that are not affected by human psychological factors have built in biases that affect data search results.

Decision Pressure Issues

Quite independent of our own outlook and how data is viewed and interpreted, the process of decision-making is often subject to various types of pressures that affect what choices are made.

One common decision-making pressure is time.  Many decisions in life have to be made within defined periods and the lack of the luxury of time often forces people to make choices based on pre-disposed and shorthand views rather than carefully tailoring a decision to a set of specific facts.

These heuristics can work to cause things that are very different to be viewed in exactly the same way. This can lead to statements that are extremely misleading such as “everything made in China is cheap” or “all politicians are corrupt”. Misleading as they are, these types of views can become the basis of deeply held beliefs with far-reaching implications on social, political and economic life.

A second pressure on decision-making is the influencing power of society.   This can take many forms, but depending on the context this pressure can involve:

● preferring to come up with a quick answer regardless of how informed it is rather than saying “I do not know” so as not to appear uninformed

● not wanting to voice opinions that go against common views so as not to offend anyone and

● going along with group thinking on the ground that “they must be right”, “they must know something that I don’t” or simply not wanting to take a minority viewpoint, particularly when voicing a minority viewpoint leads to negative consequences.

Decision Objectives 

Another important bias in decision making is that many people make decisions, not because they believe them to be right or wrong, but simply because of the fact that the decision is viewed as serving other ends rather than the search for some type of analytical truth.

For example, a junior analyst may go along with the market views of a senior banker, not because he believes that those views are correct, but because he believes that this may help ingratiate him with his superior which may help in furthering his career. A politician may vote in favor of an initiative, not because she agrees with it, because it represents the viewpoint of her political party or political constituency.

Further, some people may deliberately go against a decision or decision-making trend because they see some type of value in taking a contrarian view.

Conclusion

There are many types of bias that can have a very powerful impact on decision-making.  In the second part of this article we will look at how those biases can affect the investment decision-making process.

The photo for this article was taken from Unsplash.  The photographer is Jack Hamilton.