Message from the Chair
Steve Imke, Chapter 206
Colorado Springs, Colorado
 

Uncommon courage can cut risk

Recognizing errors of common thinking

The summer of 1996 saw two failed expeditions to the summit of Mt. Everest. The leaders of these two expeditions were very experienced guides, so why then did the expeditions fail so miserably? An analysis of factors resulting in deaths and injuries concluded that the guides suffered “cognitive bias.” Cognitive bias is a psychological tendency to direct the brain toward draw wrong conclusions. Does your business suffer from cognitive bias?

Specifically, the expeditions suffered from three common cognitive biases. The same three biases are frequently seen in business.

Number 1, the “Sunk Cost” bias. Members of the ill-fated Everest expedition invested upwards of $65k a piece and spent weeks of hiking to get to the last base camp before the final 18-hour push to the summit. There is an unwritten rule that if you have not made the summit by 2:00 in the final push, you should turn back. The two expeditions were about 300 feet from the summit at 2:00, but since the climbers had invested all that money and time to get to this point, they ignored the rule and continued on to the summit. This poor decision cost many members their lives, including the two guides. Some ran out of oxygen on the descent and some froze to death before making it back to base camp. The sunk cost bias caused the expedition members to go beyond the established abort time because they had invested so much, in terms of money and time, to get to this point. Being this close to their goal, they could not give up and, because of their sunk cost bias, made the bad decision to continue.

Some businesses invest heavily in terms of time and money in a new product or service only to discover that the landscape has changed by the time they are ready to launch. Rather than abandon the idea and move on, they pour more time and money into promoting the program or idea, only to lose more time and money. Are you guilty of a sunk cost bias?

Number 2, the “Over Confidence” bias. The guides of the Everest expeditions often boasted that they could guide anyone with average fitness to the top. They were so confident, they ignored the 2:00 rule and paid the ultimate price. In a recent poll taken of teen drivers, 93% indicated that they were better-than-average drivers, and of start-up entrepreneurs, 90% said their business would succeed. The real figures are more like 50%. I have seen many a retail entrepreneur who successfully launched their first store, and then figured they could replicate the business and open a new location, only to lose both stores. Are you guilty of an over confidence bias?

Number 3, the “Recency” bias. For our Everest expedition, the previous few years offered a better than average weather pattern during the month of May. The guides became complacent and assumed that May of 1996 would hold the same good weather pattern, when their judgment should have been based on overall weather probability. A more typical weather pattern settled in during May of 1996, catching the guides off-guard, and resulting in some of the members of the expedition freezing to death on the trip down from the summit.

America, after the first Gulf War, believed that fighting in the desert offered quick victory. Our recency bias made us assume that the second Gulf War would be just as easy. We now know differently. Business owners sometimes have a string of good fortune that is based on just dumb luck and believe the string will continue, and go “all in” when the laws of probability would suggest a more cautious approach. Are you guilty of a recency bias?
 
Realizing that we have cognitive biases that can cloud the decision-making part of our brain is an essential piece of knowledge successful entrepreneurs need to recognize about themselves and consider in their decision-making process.