Five Mental Errors MBAs Need to Avoid

The anchoring bias demonstrates our common tendency of relying heavily on the first piece of information we see – the ‘anchor’ – when making decisions.

Decisions are then made by adjusting around the anchor number, regardless of whether the anchor is legitimate for the product.

If an MBA graduate were to launch their own start-up in retail or the food industry, they should be aware of the value anchoring bias has.

Variations of anchoring include ‘Purchase Quantity Limits’ and ‘Initial Price Setting’. Pricing is one of the most common areas you’ll hear about anchoring.

For example, if you were to price a watch at $500, consumers may consider it expensive at first. But if a customer saw a watch priced at $5,000 in the store, the $500 watch will seem much more reasonably priced. The premium products work as an anchoring tool to make mid-range products seem cheaper.

But it’s worth remembering:

1)      Be aware of your target audience when using anchors. Anchoring isn’t as effective for people who are experienced in buying the product you’re selling.

2)      Don’t set your anchor too high, or the consumer’s ability to anchor the price against another product will fall drastically. Keep the price relative to the industry you’re selling in.

3)      Whether you want people to anchor or not, it’s inevitable. So, think carefully about how you structure your product range and prices.

As people, we don’t like to lose – it’s ingrained in our DNA to avoid losing wherever possible. Loss aversion looks at our tendency to strongly prefer avoiding losses over acquiring gains.

According to research, if you’re unexpectedly given $10, you’ll experience a small boost in satisfaction. However, if you were to suddenly lose $10, you’ll experience a dramatically greater loss in satisfaction.

So, this aversion to loss means an entrepreneur may be overly concerned by the possibility of losing money, to the point where they may not risk expanding their business in case it undermines profitability.

This line of thinking also leads to the ‘sunk cost fallacy’, where businesses continue to pursue a path of action despite the fact it isn’t working. Rather than adapting or pivoting, some companies will double-down on their investment, even to the point of bankruptcy or going out of business, because psychologically it feels like they’ve already invested too much to change their approach.

Blockbuster, Toys ‘R’ Us, and Kodak are three common examples for this concept. Even in a rapidly changing society, these companies refused to adapt. The companies were firmly of the mindset “we’ve always done it this way, so why change it”.

The availability heuristic refers to the common mistake our brains make when we assume the first examples that come to mind are the most important or prevalent.

An MBA student at Harvard Business School said that, while working as a purchasing agent, he was required to select a supplier out of several possible options. He chose the firm with the most familiar name, but he later discovered he knew the name so well due to the negative publicity the firm received for extorting funds from client companies.

Similarly, when thinking about MBA careers, often we only hear about certain job roles or industries to work in, but in reality, there are many other career paths you don’t hear about as much, such as fashion, luxury branding and the non-profit sector.

This can be one of the most detrimental of all. Confirmation bias focusses on our tendency to search for and favor information that confirms our pre-existing views on a specific topic.

Humans don’t like to be wrong and will look for any evidence to prove our way of thinking is right – and this can lead to a downfall in business.

Imagine your start-up is considering launching a new product. You may have formulated a specific idea of how you want it to be, but you can’t let this influence your company’s market research and focus groups, as the danger is that you’ll be subconsciously seeking answers that affirm your original idea and the answers you receive won’t be reliable. Instead, your research should dictate the idea.

One way to combat confirmation bias is to appoint a ‘devil’s advocate’ when big decisions need to be made, to ensure the result is fair.