Dr Frank Ashe of Macquarie University believes too many strategic decisions are dominated by cognitive bias. He talks to StrategicRISK about the dangers risk managers need to be mindful of.
Can you remember your drive to work? The twists and turns, the changing gears, the sharp brakes, or the long stops between lights? Probably not. The subconscious is a powerful tool used by humans to navigate daily tasks. Some of these tasks go by without even leaving a mark on our memory.
Dr Frank Ashe of Australia’s Macquarie University believes corporate decision makers are guilty of allowing their subconscious cognitive bias to influence key business decisions. This, he says, leads to increased risk across companies in every sector: “Cognitive biases affect our strategic risk processes, and strategic decisions contain the greatest amount of risk,” he says.
Ashe believes a handful of cognitive biases are particularly relevant to the corporate world. Over-confidence or over-optimism is one of them. Have you ever sat in on a management meeting, listening to a plan that raises alarm bells, but seen your fears dismissed by executives? Ashe believes this is an example of over-confidence and cognitive bias. “People at the top may be over-confident,” he says. “They’re subconsciously thinking, ‘I’m here in this position because I’m good.’ I know how to manage risk in my company, I don’t need process.”
Ashe says over-confidence and over-optimism can quickly turn into groupthink, with a host of executives buying into the same story: “The overconfidence gets bound up in groupthink, You can quickly have a group of people together, and they all start to think the same way, which is dangerous.”
Confirmation bias is another issue to look out for. Confirmation bias occurs when executives look for supportive evidence to back up their decision making, attempting to justify a decision. Ashe adds: “You have an idea and you look for things to support your idea. If you come across something ambiguous, you’ll use it to support your idea or strategy. You’re looking for things that say it’s gonna work. Anything that says it’s not gonna work, if they are found, you ignore. Confirmation bias is very dangerous.”
Ashe admits it is difficult for risk managers to intervene and prevent confirmation bias and overconfidence. He says it depends on management having an open mind: “You can’t do it by direct confrontation. It is about being comfortable pointing out where confirmation bias might be operating. How receptive are the CEO and Chair to ideas like this? Very often risk managers aren’t involved in strategy. A Chief Risk Officer should be involved in the big decisions a company is making.”
Ashe says there were confirmation bias failures at Commonwealth Bank of Australia. The bank was censured by the Australian Prudential Regulation Authority this year over governance failures, after a Royal Commission into financial services: “APRA did their report, and internally at the CBA, the audit and compliance teams said ‘we’ve been saying that for years and no one listened to us’. That is indicative of confirmation bias and overconfidence. CBA management was thinking ‘we must be great and compliance must be exaggerating’.”
There are other human brain traits to be mindful of. Ashe says the human brain is prone to being swept up in a good story, such as a well-delivered strategy: “If someone comes along with a convincing story and comes along with a strategy, you can get all the optimism, groupthink, confirmation bias all wrapped up. Everybody is locked on to it. Narrative is a very powerful process, and you have to be very careful about falling for a narrative. You need to say, ‘that’s a great story, but now I’ll try and pick it to pieces’. That’s how you can try and understand what is going on.”
Ashe called on all companies to have a “devil’s advocate” approach to decision making: “They [executives] need to look consciously at the things that could go wrong. You need to know what some of the shortcomings are.”
How can risk managers mitigate against cognitive bias? Ashe says managers can take practical steps to stop the subconscious dominating key decisions: “Make sure you do have a good debate, which can be helped by an appropriate devil’s advocate. Make appropriate use of outside experts. Before anything is settled, have a review of it. Ask what unstated assumptions you have made. Is there a place where we have taken a leap of faith? Or a leap of logic that is not supported by the facts we’ve built up?”
Ashe believes risk managers have an essential role weeding out cognitive bias from the decision-making process. He adds: “Risk management is the application of those tools to all of the major decisions made in an organisation. They are applied to safety schemes, but not strategy, unless something goes dramatically wrong.”