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 favorable 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.