Cognitive Bias

With much of the low hanging fruit of “best practices” already agreed upon and institutionalized, Dan Boxer who is an Adjunct Professor of  governance, ethics and social responsibility and co-chairs the Governance Symposium at the University of Maine Law School, is among those turning more attention to behavioral science impacts on corporate board decision making and independence.

Dan shared a great resource with me: A Visual Study Guide to Cognitive Biases posted on Slideshare by Eric Fernandez for the Royal Society Of Account Planning. Cognitive biases are psychological tendencies that cause the human brain to draw incorrect conclusions, through intuitive thinking. Daniel Kahneman‘s work in the field won him a Nobel prize in economics. Listen to his 38 minute Nobel prize lecture.

For those interested in a very thorough law review article on the unconscious biases affecting boards, Dan highly recommends  “Unconscious Bias and the Limits of Director Independence “ by Antony Page,  University of Illinois Law Review, Vol. 2009, No. 1, 2009.  In addition to an excellent analysis of many forms of unconscious bias, the article also suggests some  reforms to counter the extensive director protection the Delaware courts have provided against claims of bias or  lack of independence. In fact, the current presumption is so strongly in favor of a director’s lack of bias that a plaintiff must demonstrate that the director was  “dominated,” essentially “controlled.”

Eric Fernandez’s very helpful guide includes brief descriptions of the following:

• 19 social biases, such as the Forer effect / Barnum effect. The tendency to give high accuracy ratings to descriptions of their personality that supposedly are tailored specifically for them, but are in fact vague and general enough to apply to a wide range of people. For example, horoscopes.
• 8 memory biases, such as Suggestibility. A form of misattribution where ideas suggested by a questioner are mistaken for memory.
• 42 decision-making biases, such as Hyperbolic discounting. The tendency for people to have a stronger preference for more immediate payoffs relative to later payoffs, where the tendency increases the closer to the present both payoffs are.
• 36 probability / belief biases, such as Positive outcome bias. The tendency to overestimate the probability of good things happening to them (see also wishful thinking, optimism bias, and valence effect).

Boards of directors would do well to become familiar with each of these biases and to help each other guard against them.