In this article, we'll look at 6 cognitive biases that we've seen most often in practice – and why an „outside view" is sometimes more valuable than thirty years of experience.
1. Sunk cost fallacy: when we hold on to what we should let go
A client invested €400,000 in a new production line. After two years, it's clear that the market has turned and the product isn't selling. Logic says: stop, write off the loss, redirect resources. Reality? Another €200,000 invested in the „rescue", because „we've already put so much in that we can't back out".
This is the classic sunk cost fallacy – the irrational clinging to expended resources that are no longer recoverable. The money you've spent is gone. The question is not „how much have we put in", but „what would we do with these resources today if we were starting from scratch".
2. Overconfidence: „it can't happen to us"
The DALBAR study shows that 80% of managers consider themselves above average in decision-making. Mathematically, this makes no sense – at most 50% can be above average. This phenomenon is called overconfidence bias and in practice manifests itself, for example, like this:
„We don't need an audit, we have it under control."
„Cashflow plan? I have it in my head."
„Our accountant has been doing this for twenty years, surely everything is fine."
The problem is that the longer things go well for you, the less you question your own systems – until the moment something breaks. The best bosses we know have the exact opposite: paranoid humility. They regularly assume that there is something they don't know.
3. Confirmation bias: we look for data that proves us right
When a CEO decides to expand into a new market, they subconsciously begin to notice signals that confirm their decision and to ignore those that should slow them down. Reports from subordinates are filtered on the way up. Negative numbers are „explained". Skeptics are pushed aside.
That's precisely why external advisors – auditors, tax advisors, consultants – have such an unpleasant but important role. They are the only ones who have no motivation to tell you what you want to hear.
4. Loss aversion: fear of loss decides more than the prospect of gain
Kahneman and Tversky demonstrated that people perceive a loss 2× more strongly than a gain of the same size. A loss of €10,000 hurts twice as much as a gain of €10,000 pleases. In business, this leads to:
excessive diversification and thus dilution of returns,
holding cash instead of investing (because „what if"),
avoiding unpleasant decisions, such as dismissing an underperforming employee or terminating an unprofitable contract.
Paradoxically, avoiding a short-term loss often leads to a much greater long-term loss. However, this is not visible immediately, so it is not discussed.
5. Optimism bias: „cashflow is enough for us, we had a good December"
In financial statements, we regularly see companies that had a good previous year and automatically assume that this one will be the same or better. Only in September does it turn out that growth didn't come through and fixed costs have already grown by 15%.
Optimism bias is the systematic underestimation of the probability of negative events in one's own projects. Others have outages. Others have tax audits. Others lose a key client. Not us. A regular cashflow stress-test (what happens if 20% of revenue drops out for 3 months?) eliminates 80% of these surprises.
6. Status quo bias: „we've been doing it this way for twenty years"
The quietest but most expensive mistake. The company boss doesn't change the accountant who does the bookkeeping carelessly, because „he is a family friend". He doesn't change the ERP system that is now slowing the company down, because „there is no time for implementation". He doesn't change the established pricing, even though the competition has long overtaken it.
The status quo has tremendous inertia. That's precisely why periodic external reviews (audit, tax due diligence, process audit) are so valuable – they force the company to look at itself with fresh eyes.
Why an „outside view" is more valuable than another year of experience
The common denominator of all these biases is one thing: there is no way to reliably identify them in yourself from within. Our brain produces them faster than we can rationally correct them. That's precisely why the most successful bosses don't have „better" thinking – they have a system that controls their thinking.
Are you interested in an outside view on the financial health of your company? We will prepare a non-binding analysis for you that shows what your profit and loss statement is actually saying – and where the silent consumers of your margin are arising.
