Are your biases affecting your business?

Self-serving bias – the subconscious tendency to take the credit for successful outcomes but blame others for failures – is a well-documented syndrome in psychology. It’s hard to take a clear-eyed look at ourselves and acknowledge our shortcomings. It’s the stuff of life to find out who we really are.

‘Price and quality decisions by self-serving managers’, a new research paper co-authored by Oded Koenigsberg of London Business School, Marco Bertini, Professor of Marketing at Esade, and Daniel Halbheer, Associate Professor of Marketing at HEC Paris, sets out to explore whether this bias affects managers and the companies they lead. Using a new model that describes the effect of bias on decision-making and its consequences, the research suggests that managers are not reflecting enough on their potential shortcomings and that much research is too focused on understanding customer biases without applying the same thinking to managers’ decision-making.

How bias works

To model how self-serving bias modifies decisions, the paper explores it in the context of two competing strategies – price and quality. According to the researchers, firms are anxious about getting stuck between the two approaches to the market, so they tend to stress either the price or the quality of their products, but not both.

In the supermarket sector, for example, Walmart claims “price leadership is core to who we are”, while Wholefoods says quality is “the highest form of value”.

In consumer electronics, Asus bets on price, claiming that it is “aggressive prices that make technology accessible to all”, whereas Apple emphasises quality because it creates “the kind of wonder that revolutionises entire industries”.

In fashion, H&M boasts “the best price for its customers”, but DKNY claims “the highest standards of creativity and quality”.

And, in the airline sector, easyJet wants to make travel “easy and affordable”, whereas Emirates strives to “inspire travellers with excellence in service”.

In each case the firm decides that either price or quality is its defining and dominant strategic approach.

Strategy vs reality

The bias comes in when the strategy comes into conflict with reality and it doesn’t deliver performance.

There are two scenarios where managers’ bias is likely to arise: crediting the dominant strategic factor when events go according to plan, and blaming outside forces, such as a competitor undercutting prices, when performance falls behind expectations. Managers rarely criticise their dominant strategic factor; rather, it is pushed beyond criticism in the decision process by the self-serving bias.

In other words, they feel better when they imagine that poor performance is the result of external factors and nothing to do with themselves.

The paper endeavours to show how this self-serving bias shifts the framing of decisions, rather than whether the actual decision taken is biased or harmful.

“This is the first time I’ve used psychological bias in a paper,” says Professor Koenigsberg. “My interest is not the bias itself, but how it might limit managers and their decisions. It was fascinating to me to see how a self-serving bias affected the scope of decisions that managers are taking. It’s more intuitive to understand how decisions are restricted with a quality-oriented company, but we found the same outcome with price-oriented companies.

“Managers, like other human beings, are constrained by their own limitations. And even if they are excellent managers, they are still susceptible to bias that affects their decisions. We found that, in some cases, it does not affect the performance of the company or that of the managers themselves – but sometimes it does. So, managers need to ask themselves: ‘How can we make sure it doesn’t hurt us and/or the firm that we represent?’

“That’s a question I ask executives. I can provide them with statistical evidence to show that bias happens and layout mathematical models to demonstrate the effect of such bias, but accepting that it goes on in their own firm is still difficult for them. How do we cope with these biases when we are not aware of them? It’s something every manager has to ask themselves every day. How can we develop an awareness or a mechanism, if not to resolve it, at least to mitigate its negative effects? This is the challenge posed to executives by this research.”

Interestingly, it appears that the effects of bias aren’t always negative and that firms sometimes benefit from managers who have problems with causal reasoning.

Need for awareness

This challenges the idea, which has sometimes been put forward, that biases should be screened out at recruitment or mitigated through incentives and training.

In fact, the research shows such “problems” can add weight to a firm’s choice of orientation in the market.

Surprisingly, stressing price over quality allows firms to enjoy higher profits because the self-serving adjustments lead to sticky quality under a price orientation, which relaxes competition and allows managers to charge higher prices.

Randall S Peterson, Professor of Organisational Behaviour at LBS, whose own research approaches bias from an interpersonal perspective, acknowledges the difficulty of overcoming subconscious bias. “Checking one’s biases is very difficult,” he says. “This is why working in a diverse group, with multiple biases represented, can be so powerful if it is well managed. The key is to stay open to feedback and surround yourself at work with alternative perspectives.”

Oded Koenigsberg is Professor of Marketing at London Business School