Most of us remember the central scene in the science fiction film, the Matrix, where the Judas character Cypher betrays the rebels to live in a more comfortable "reality". In the scene, Cypher is sitting across the lead agent, Smith, in a fine steak restaurant. Cypher admits he is willing to betray his friends in the real world to get a comfortable life inside the Matrix. Aside from his request for wealth and fame, Cypher insists that he doesn't want to remember anything from the real world but live obliviously in the Matrix "reality". When sealing the deal, Cypher says: "You know what? I know that this steak doesn't exist. I know that when I put it in my mouth, the Matrix is telling my brain that it is juicy and delicious. You know what I've realised after nine years?" he asks and eats a bite of his steak: "Ignorance is bliss."
The Matrix of the real world
In business, our challenges deciding what is real or not of course has nothing to do with being man-sized batteries in a virtual world created by a mad supercomputer. Instead, the challenge we battle with is how we as executives recognise that our way of assessing reality is largely influenced by what we already believe in - whether our belief is correct or not. While we like to envision ourselves as objective, impartial individuals, this view couldn't ne further from the truth. In reality, we judge our world according to our heuristics and mental models of the world, shaping how we react and make decisions. The fact that we operate from these models is not necessarily a bad thing. But sometimes these mental models hit systematically miss the target, for instance in Nokia case where the management were in a dire need to change the very same mental models and strategies, that had brought them an abundance of success in the past.
“We didn’t do anything wrong, but somehow, we lost.”
- Nokia’s CEO Stephen Elop
The reason why we battle with our own sense of reality and the real reality, is due to a bias called confirmation bias. It is the imbedded human tendency that influences all of us to put more faith in information that agrees with what we already believe, and discount opinions and data that disagree with our beliefs.
Confirmation bias explains in part why it’s nearly impossible to present enough factual evidence to convince a staunch Democrat or Republican that their candidate has serious flaws, or to persuade someone arguing for or against the welfare state that the other side may have a few good points. Confirmation bias can creep into every decision we make – employee performance evaluations, major purchases, management actions, and so on.
For investors, confirmation bias is particularly dangerous. Once an investor starts to like a company, for example, he may dismiss negative information as irrelevant or inaccurate. Investors often stick with a declining stock far longer than they should because they interpret every bit of news about the company in a way that favours the company prospects, and even seek out information that bolsters their case that the company remains a good investment.
Confirmation bias:
"What you believe is what you see - and this becomes your reality."
Confirmation bias lead us to collect, remember or interpret information selectively, and we are constantly seeking to convince ourselves and the people around us by filtering the data to support our way of seeing the world. This is why confirmation bias diminishes creative thinking.
Creative thinkers use information to re-evaluate the ideas and to avoid status-quo scenarios - rather than confirming their existing beliefs. Innovative thinking is costly and difficult because the confirmation bias is part of our inner mechanics; it is all too easy for us to stop innovating and instead reproduce old ideas, especially if they have previously proved successful.
This is why the mighty companies such as Nokia or BlackBerry fall, or why 70-90 percent of new business initiatives fail. It is not due to a lack of well-meaning, hard-working and enthusiastic people, but simply because they are people - and by definition subject to the firm grip of the confirmation bias.
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Sources:
Decision Strategy, coming out soon at DJOEF Publishing