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Committees: Checking Biases at the Door 
By: Ryan Walter, Institutional Consultant
Many organizational decisions are made in a group setting with the rationale that the collective expertise of the individual members of the group will contribute to better decision-making. Boards, committees and the individuals that comprise them are tasked with making tough decisions that carry both short-term and long-lasting effects. It is important to recognize the biases, both cognitive and emotional, that individuals, as well as committees exhibit, and seek to mitigate if not completely overcome them. 

Cognitive biases result from the inability to analyze information or from basing decisions on incomplete or partial information. These biases can often be neutralized through the comprehensive analysis of supporting information and education. Conservatism bias occurs when individuals form an initial view, but then fail to change that view when new information becomes available. Individuals tend to avoid the mental effort or stress of updating a view as the thought process or information becomes more challenging to comprehend. Conversely, representativeness bias, concludes that new information is over-weighted and taken as too representative, triggering decisions based on a small sample of information. New as well as old information can be found and/or distorted to support an existing view in a third cognitive bias known as confirmation bias, in which individuals attempt to find what they want to support an existing viewpoint and hence, become convinced that their ideas are correct. Committee members should carefully evaluate new information to determine its value and avoid letting overly simple “rules of thumb” take the place of more thoughtful analysis. Also, committees should seek out information that appears to contradict their opinions and analyze carefully.

Emotional biases stem from the way individuals frame the information and the decision rather than the process used to analyze and interpret; in other words, emotion and feeling drive the decision-making process rather than conscious thought. Emotional biases are often better mitigated, as overcoming them tends to be more difficult than overcoming cognitive biases. One of the most well-known and studied behaviors, herding, takes place when individuals gravitate toward the consensus or popular opinion. Essentially, some individuals tell themselves they aren’t to blame if others are wrong too. Herding is closely related to two emotional biases, regret aversion and loss aversion. Regret aversion bias occurs when individuals do nothing out of excess fear that actions could be wrong. This bias attaches undue weight to actions of commission (doing something) and doesn’t consider the actions of omission (doing nothing). Individuals exhibit a much stronger sense of regret and pain for acts of commission. In the same vein, loss-aversion bias arises from feeling more pain from a loss than pleasure from an equal gain. The fear of being wrong can be contrasted to a third emotional bias, overconfidence. Overconfidence bias results when individuals overestimate their own intuitive ability or reasoning. This illusion of knowledge or control is rooted in the desire to feel good about one’s self, but can lead to an underestimation of inherent risks and an overestimation of the view’s probability of success. These biases can be mitigated by adhering to a disciplined process with an emphasis on achieving long-term objectives.

The aforementioned biases can either be diminished or amplified with additional biases in a committee setting. Committees are frequently comprised of individuals with similar backgrounds and thus, they may approach problems in the same manner. This groupthink can lead to biases and suboptimal decisions. In a group setting, individuals may feel uncomfortable expressing their opinions if it differs with others or a more vocal member of the group. Biases can be mitigated and overcome by forming committees comprised of members with diverse backgrounds who are not afraid to express their opinions even if they differ from others. Furthermore, committee chairs should encourage members to speak out even if the member’s views challenge the consensus and a mutual respect should exist among all members. This environment should contribute to the success of the committee’s decision-making process and ultimately, the committee’s purpose of perpetuating the institution’s long-term mission.

Please contact any of the professionals at DiMeo Schneider & Associates, L.L.C. for more assistance with your committee dynamics or forming the ideal committee.
While this article addresses generally held investment philosophies of DiMeo Schneider & Associates, L.L.C., it does not represent a specific investment recommendation for any individual client or prospective client. Please consult with your advisor, attorney and accountant, as appropriate, regarding specific advice.
This report is intended for the exclusive use of clients or prospective clients of DiMeo Schneider & Associates, L.L.C. Content is privileged and confidential. Any dissemination or distribution is strictly prohibited. Information has been obtained from a variety of sources believed to be reliable though not independently verified. Any forecasts represent median expectations and actual returns, volatilities and correlations will differ from forecasts. Past performance does not indicate future performance.  
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