How bias can affect your business decisions

Q: Biases can often result in suboptimal decisions. Are there certain decisions or situations in which biases can be constructive?

A: The best way to deal with biases is to understand them. Putting biases in an economic context helps us to do this.

Behavioral economics refers to addressing biases that impede our rational decisionmaking. This assumes that nonrational decisions are always suboptimal. Most of us make decisions based on mental shortcuts. Analytical reasoning is placed aside, but this does not necessarily mean outcomes will be suboptimal.

Rational choices are based on marginal utility. Before we act, we assign values to each option based on preferences and available resources with the hopes of getting something more. We do this by making choices that are weighted by data.

However, many of the decisions we make are based on personal beliefs, values and affinity to people. Richard Robb in his book, "Willful," notes that not all human actions are purposeful. Many choices are based on personal preferences or beliefs and do not involve the process of doing anything rational. These decisions, like altruism, have a "for-itself" quality. Sometimes a phenomenon classified as a behavioral bias is really a rational choice in disguise.

Let's take self-confidence. It is often defined by behavioral economists as the most significant of behavioral biases because of its seeming resistance to change and learning. On the other hand, self-confident leaders believe in themselves and are willing to exercise their will in the face of rational choice. Spontaneous "for-itself" judgments are seen in entrepreneurs who challenge the markets or in organizational leaders when quick decisions are mandated. Investors will relax their commitment to best practices to accept an on-the-spot opportunity. In these and other instances, for-itself activities give one license to embrace conduct that cannot be explained in terms of purposeful choice. The risk is falling into recklessness.

Rational choice cannot explain all our actions and for itself is fraught with risk. There is no clear way to optimize. Yet, Robb urges us to keep the for-itself in mind because acts of will cannot arise out of passive calculations to satisfy preferences or they would no longer be acts of will.

Jack Militello is a professor of management at the University of St. Thomas Opus College of Business.