Wealth, Well-being and Cognitive Bias

At one point in my financial career, I was told by a group of men who I believed to be veteran leaders that they had assembled and decided to demote me for doing too much and to enhance my value and credibility. This experience launched my interest in the topic of cognitive bias, especially within financial arenas and leadership.

The thought that demoting women for doing too much would be remotely productive, much less gathering a group to vote in the affirmative, still baffles me to this day. It’s the kind of decision you would expect when men play drinking games with their organizational chart.

It’s hard to explain how leaders who advance to high levels within a company could possibly believe demotions add to a person’s value and credibility. If they really believed it, wouldn’t they proceed to race each other to the lowest tiers of their hierarchy?

Could this be the kind of bias where men think something may be detrimental to a man but beneficial to a woman?

I’ve had the privilege of serving on a dozen (or more) boards and have held a collection of leadership positions. The most dynamic, entrepreneurial, and resilient groups foster a respectful debate and idea-collision culture. High-performing leaders value critical thinking skills in others and are willing to look at opportunities and challenges from many perspectives. Great leaders understand that there is a spectrum of risks to navigate and that every decision presents advantages and disadvantages. Lesser leaders jump to conclusions and solutions when they haven’t taken the time to identify what they are solving for clearly. I’m still astounded that a group exists that thinks women doing too much is a problem that needs attention.

If you recruit the right people with intention, encourage thoughtful debate and deliberation, and nurture a culture of inquiry, you can strengthen organizational decision-making and discard silly, or worse, damaging, proposed changes. Alternatively, if top leaders have fostered a “yes man” culture, the most base, nonsensical ideas can be affirmed and put into action.

Cognitive Bias Explained

Various cognitive biases can influence our thinking and decision-making in finance and life. Some common types of cognitive biases include:

1. Confirmation Bias: The tendency to search for, interpret, and remember information in a way that confirms our pre-existing beliefs or hypotheses.
2. Availability Bias: This is when we rely on readily available information or examples that come to mind easily when making judgments or decisions rather than considering all relevant information.
3. Anchoring Bias: When we rely too heavily on the first piece of information encountered (the “anchor”) when making decisions and give it more weight than it deserves.
4. Overconfidence Bias: Overestimating our abilities, knowledge, or the accuracy of our beliefs and judgments.
5. Hindsight Bias: The tendency to believe, after an event has occurred, that you would have predicted or expected the outcome, leading to an overestimation to predict the future.
6. Framing Bias: The way information is presented or framed can influence decisions. People tend to react differently depending on whether information is presented as a loss or gain.
7. Recency Bias: Giving more weight to recent events or information when making judgments or decisions while discounting older or less recent information.

Avoiding the Bias Trap

Guarding against cognitive bias can be challenging, but several strategies can help. Here are a few suggestions:

1. Awareness: The first step is to be aware of the existence of cognitive biases. Educate yourself about different types of biases and how they can influence your thinking. Knowing that biases exist can help you recognize them when they occur.
2. Critical thinking: Develop the habit of critically evaluating information and arguments. Question assumptions, seek multiple perspectives, and consider alternative explanations. This can help you avoid falling into the trap of biased thinking.
3. Seek diverse perspectives: Surround yourself with diverse sources of information and different viewpoints. Engage with people who have different backgrounds, beliefs, and experiences. This can help challenge your own biases and provide a more balanced perspective.
4. Slow down and reflect: Take the time to reflect on your thoughts and decisions. Slow down your thinking process and consider the potential biases that may be influencing your judgment. This can help you make more rational and objective decisions.
5. Gather objective data: Rely on objective data and evidence when making decisions rather than solely relying on personal experiences or anecdotes. Look for reliable sources of information and consider multiple data points before drawing conclusions. For example, might the proposal have been shelved if the proposer of “demotions enhance the value of women” had been asked to quantify the enhancement and provide supporting documentation?
6. Seek feedback: Regularly seek feedback from others to gain different perspectives and identify potential biases in your thinking. Encourage honest and constructive criticism to help you become more aware of your biases. For example, a company survey inquiring how people felt about demotions most likely would have conveyed to leadership that not many would consider it an enhancement or beneficial.
7. Embrace uncertainty: Recognize uncertainty as a natural part of decision-making. Avoid the tendency to jump to quick conclusions or rely on gut feelings. Embrace the situation’s complexity and be open to adjusting your thinking based on new information. Be willing to look at solutions employed by people outside your city, your region, and even your industry; sometimes, the traditional playbook should be bypassed and new strategies instituted.

No one is entirely immune to cognitive biases, but by being aware and actively working to mitigate their influence, we can make more rational and objective decisions for our lives and our wealth. My goal is to help clients make solid, sustainable decisions to deliver optimal outcomes over the long term.