So you think you're unbiased? This in itself is a form of bias, often called 'overconfidence', which we should be careful to avoid when making crucial as well as every-day financial decisions.

An article by three partners at McKinsey - The business logic in debiasing - looks at the different types of bias (they list five categories) and discuss some practical ways in which company executives can debias their decision-making processes. First of all, the authors - Tobias Baer, Sven Heiligtag, and Hamid Samandari – give the following definition, explaining that biases are “predispositions of a psychological, sociological, or even physiological nature that can influence our decision making. They often operate subconsciously and by definition are outside the logical process on which decisions are purportedly based”.

Bias will cost you money

Biased decision-making can cost your company money. It can lead to bad capital allocation, poor bank selection or even being overly risk-averse. McKinsey's found that companies that allocate capital dynamically – rebalancing regularly according to performance – return between 1.5 and 3.9 per cent more to shareholders than companies with more static and routine budgeting.

A failure to question decisions – including the decisions that seem core to the business and may be almost taken for granted – also amounts to a bias, so executives need to be aware of this and seek to actively address and reassess decisions.

The McKinsey article also notes that 'reducing decision biases' is the top aspiration for improving performance, according to a survey of 800 board members and chairpersons.

Biases can take a wide array of forms, from gender bias to a bias for stability or against change. McKinsey summarises five types of bias that company executives should look out for:

• Action-oriented biases – these are biases that prompt people to take action with less thought than is necessary, including excessive optimism, overconfidence or underestimating a competitor.
• Interest biases – where there are incentives for individuals, emotional attachments or differing perceptions of corporate goals that are in conflict with a project.
• Pattern-recognition biases – cause people to recognise non-existent patterns in data or events, including confirmation bias and using false analogies to compare dissimilar things.
• Stability biases – this is the tendency to favour the status quo rather than adapting to a changing environment and failing to take new data into account, or loss aversion which is being overly risk-averse.
• Social biases – these include the 'groupthink' mentality and a tendency to agree with the boss. People may be averse to questioning and challenging authority, are overly keen for consensus and therefore neglect a realistic appraisal of alternative courses of action.

Six ways to combat bias in your organisation

And the article goes on to discuss several ways to combat bias in your organisation:

1. Unbiased tools

Analytical tools, statistical algorithms and other statistical decision systems can be used to analyse patterns and probabilities in large data sets. This is useful for many process-based activities or high-frequency decisions.

2. Be aware of possible bias in oneself and groups

For less frequent decision-making, such as decisions on large investments, M&A or organisational and business transformations, recognition and awareness of the possible biases in oneself and others is crucial – for example overconfidence in senior management, as described above. The McKinsey authors write: “Executives who learn to accept the signals of their own biases and correct for them make better and more effective decisions.”

3. Test data for bias

The data underpinning important decisions also needs to be tested for bias, so that decisions are made on an 'objective fact base'.

4. Fight bias with diversity

For less frequent decisions such as technology implementations, decision-making groups should be structured so that biases are less likely (by having a diverse range of expertise and opinions involved).

5. Devil's advocate

Use independent observers to play a formal challenger role and question the proposals put forwards.

6. Debias with benchmarks

These can be used to promote neutral evaluations. McKinsey's authors write: “For financial analysis of proposals, for example, a requirement that financial ratios be presented with peer comparisons can foster unbiased perspectives.”