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Cognitive Biases And Business Organization

In the current competitive context, marked by an increasingly clear relevance of strategic levers linked to human, technological, and organizational skills, SMEs find themselves in an unfavorable and, at times, difficult situation. The link, often the umbilical cord, which binds these realities, often very interesting and profitable, with the entrepreneur or the family-owner group is well known. 

This link, once (and sometimes still) the source of a rapid and effective response-adaptation capacity, is now being put to the test by the growing complexity, transversality, and interdependence of the strategies that the companies themselves are called to identify and execute to keep alive the current, or near future, ability to compete.

The Individual And His Rigidities

The nucleus of the matter, as suggested by the title of this starting point, is to understand how the individual acts, what consequences are his limits, his merits, and the rigidities they can entail. In the specific case of the small-medium company, characterized by limited organizational development, low staff turnover, and, comparatively, a low contribution from external contributions, the individual entrepreneur has played. 

Still, it plays such an essential role that the company “resembles” it very often. That is, it has its strengths but also its defects. Therefore, the first point to consider is the rigidities that, often, the individual, be it the entrepreneur, be he an employee, or another stakeholder, introduces and maintains in the area he presides over.

Bounded Rationality And Heuristic Methods Of Judgment

As important past and recent studies demonstrate, each individual tends to operate in a non-perfectly rational way, in a regime that can be defined as “limited rationality.” The factors that mainly limit the rationality of the individual are:

  1. The availability of information (too little / too much)
  2. The cognitive limitations that are specific to him (cultural, logical, experiential)
  3. The finite amount of time available to make choices

To by-pass these limitations, however, the human mind has developed, over the centuries of cognitive development of our brain, heuristic methods, i.e., methods capable of helping oneself in learning/solving the evaluation problem autonomously; we could define them as unconscious stratagems that support and optimize the ability to choose quickly and with a relatively low effort (even in terms of energy consumption, given that the brain is the organ that consumes the most energy in our body by comparison). Among them, we mention : 


That is “anchorage”; the index term which, when the individual does not have relevant information on a fact, on a situation that he must evaluate, tends to decide based on available “close” information, a “next-best solution,” even if this, at times, can lead to having an utterly arbitrary reference in the judgment it exercises.


The individual tends to assign a greater probability, in a not entirely rational way, to the information he remembers more vividly, more clearly, perhaps because it has just been learned and therefore available directly and readily to his memory2.


The individual develops specific methods, sometimes stereotypes, to categorize information, an action necessary for their rapid indexing and for recalling memory; however, this generates rigid mental models, especially from a business point of view. We will come back to that point later. If, on the one hand, the three methods briefly described above help to make choices quickly and efficiently, on the other hand. They generate “mental biases,” unconscious “inclinations,” and “distortions” which influence the choice activity.

What Are These Distortions? How Can We Describe Them In Short?


How information and choices are arranged and presented influences a person’s judgment. This is explained by the fact that people tend to be passive, i.e., to maintain a low level of attention. For this reason, the exhibition methods, highlighting or developing predetermined paths, can influence the final choice.


In new situations where the individual lacks historical information, there may be a reduced ability to estimate risk. Think of the reduced ability to perceive indirect competitive risk deriving from products/services not historically present in the company’s competitive arena. This is linked to the reduced perception of the need to change, which is often physically perceptible within some organizations or by confronting their leaders.

Loss Aversion

In situations already characterized by an investment, the individual hardly changes his mind, although there are more profitable alternatives, if he has to risk the investment made. These are experiments carried out on a large scale. The individual does not put 100 at risk even if he has a high possibility of earning 180. This leads, in business terms, to organizational inertia: “what is good cannot be changed” even if, maybe… There are great opportunities to seize!

Status Quo

The individual tends to “hold the position.” The individual tends to reject change as it introduces a need for attention, which, at times, is a (more or less unconscious) problem.

Is It Necessary To Counter Cognitive Bias In Business Organizations?

It is evident that the behaviors described above are inherent in the human mind and, as seen, have positive purposes. However, from a business point of view and, specifically, speaking of organizational strategy, it is possible (and must) develop methodologies and adopt corrective measures that contrast the negative aspects that these distortions introduce to have an evaluation-executive decision-making system balanced.

Some Coping Strategies

In contrast to the mental bias defined as “optimism,”: to improve the perceptive capacity of the risk and the state of the organization, it is essential to introduce in favor of the fundamental decision makers present in the organization.

  1. Elements of external vision: for example, by giving the advisory board the task of collecting and presenting these new elements to be considered, or, for smaller companies, introducing consultants and sector experts for an invigorating “return of air.”
  2. External data: it is important to compare data, including quantitative data, but not only which adequately represents the context for the management team to understand the competitive dynamics that are impacting the sector
  3. In contrast to the mental bias defined as “risk aversion,”: it is essential, especially where there are structured evaluation and incentive systems and concerning roles in which autonomy and creativity are relevant, that specific individual choices are not penalized disproportionately; otherwise, you will find yourself in a situation in which the choices will be made by favoring historical criteria, to minimize the risk of error (which however will reduce the company’s ability to innovate and face calculated risks as a whole)
  4. Contrast to the mental bias defined Status-quo: it may be necessary, at certain times, to propose an approach in which the default option is simply outside the exercisable options. This is to stimulate a deep reflection and a push for change explicitly.

In contrast to the influence of rigid “mental models,”: it is essential to evaluate carefully to reduce the impact that the mental models described above inevitably entail:

  1. The implementation of structured and continuous training courses
  2. The introduction of elements of diversity in terms of culture and basic training in personnel a
  3. The implementation of the rotation concept to promote flexibility

It is evident that, above all, in contexts that are not very structured and linked to family-type logic, the recommendations described above find a natural limit in need to maintain control of the management activity rigidly in the hands of a few defined individuals, at times, to a single individual. We can therefore find ourselves in situations in which the “push for change” seems to coincide with the “will to remove” the figure of reference, which naturally tends to place the question on different bases from those of the company and to make it slide on rugged and complex terrain.

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