“Critical thinking is the one skill that will be imperative for you to succeed.”
The words uttered by a mentor a couple of years back, started me on my journey to decipher what it meant and its uses. This article will help explain the concept, its importance and a few practical applications that have helped me in my career.
What is Critical Thinking?
Critical thinking helps identify and rectify defects in both others and your thinking and ensure that any decisions or conclusions formed are grounded in rationality and objectivity.
Why is it Important?
- Boosts self-awareness: Self-awareness helps an individual and thus the organization develop a sustainable competitive advantage. Thinking critically forces you to be self-aware and helps increase your self-awareness quotient.
- Helps deal with increasing amounts of uncertainty: There is an increasing level of uncertainty (uncertainty is more complex than risk) in the business environment. Critical thinking forces you to abandon mental models that have worked well in the past but might not be relevant for today’s set of issues.
- Awareness of cognitive biases: Cognitive biases are simple errors that are ingrained in our day to day thinking. Critical thinking forces you to unearth biases that you never thought existed in your thinking.
- Ensures focus on the process not the outcomes: Critical thinking ensured that the focus very rightly, is placed on the process and not the outcome. The right outcomes typically follow a critically thought out process.
Practical applications of Critical Thinking
Cognitive biases is an area of critical thinking that has a lot of relevance in it’s practical applicability. I’ve highlighted some common cognitive biases I’ve come across in my career below and measures to mitigate them.
Awareness of these could lead to our becoming more well-rounded professionals.
The Authority Bias
Budgeting meetings where the group agrees with a market growth assumption made by a senior sales leader without much debate? This could be the authority bias at play. It is the tendency to attribute greater accuracy to the opinion of an authority figure.
This can be mitigated by functions coming prepared with data to the decision table, challenging key assumptions and ensuring that the right business decisions are made. Your business leaders and organization will thank you for it.
The Optimism Bias
A new business failing because of a lack of market need for their product? This is the optimism bias at play i.e. the tendency to overestimate success or underestimate failure. Optimism is generally viewed as a positive way to view a situation but it can be counterproductive in a business setting.
The best way to mitigate this bias is to pressure test the underlying assumptions i.e. actively seek out points of view that challenge the chances of success rather than look for views that confirm your conclusions.
The Anchoring Bias
Here’s a quick exercise. Estimate how many metres higher or lower than 75 meters is the world’s tallest weeping willow tree.
If your estimate is in the absolute range of 0-30 meters you have fallen prey to the anchoring bias i.e. a tendency to anchor on an initial value while making decisions. The world’s tallest weeping willow tree is only 14 meters and getting an estimate close to this value will require us to completely ignore the initial value of 75 meters.
Mitigation? Keep in mind the willow tree example when given an initial piece of information or when you look to purchase a house. Use tools like Zero Based Budgeting to get cost structure estimates right.
The Omission Bias
You come across a newspaper article about a fire in the neighbourhood that was set off by an arsonist. Onlookers did not do much to douse the fire or alert the authorities. Who would you judge as guilty, the arsonist or the onlookers?
If you judge the arsonist more harshly you have fallen prey to the omission bias i.e. the tendency to judge harmful action as worse than equally consequential inaction.
Mitigation? When you see a business scenario unfold that needs correction(for example an approved business case that is not being implemented as planned) , assume responsibility and take actions towards resolving it rather than justify your inaction on the grounds that it is not in your scope,etc. That would ensure you are part of the solution and progressing well towards becoming an effective finance business partner.
The Forecasting Bias & Illusion of Control
Patting yourself on the back for an accurate revenue forecast? Watch out- the forecasting bias and the illusion of control is at play. The illusion bias is the tendency to think that one has more control than apparent over the result of a very difficult process i.e. forecasting.
Have found the following to help mitigate the impact:
- Focus more on the robustness of the forecasting process that led to the outcome rather than the outcome itself.
- If you are in a regional finance consolidation role, be aware of the “forecasting personalities” of the different regions and adjust your consolidated forecast for the optimists and conservatives!
I recomment the reads below, to start you on your journey of critical thinking:
- Thinking, Fast and Slow – Daniel Kahneman
- The Art of Thinking Clearly – Rolf Dobelli
- Critical Thinking – Linda Elder and Richard Paul
- All Malcolm Gladwell books
(Shiva Vilayanur is a senior finance leader currently based out of Singapore. Cognitive biases are an area of interest for him. He can be reached via LinkedIn at Shiva Vilayanur.)
Thanks Shiva for the beautiful post ! Biases are hidden , however surprisingly critical in our choices to act or otherwise. Authority & Omission biases are totally relatable ! Nobel Laurate Daniel Kahneman’s book is truly insightful read ! Shall try the other ones you have recommended.
Great, Ankitha. We would love to know what you think of the books 🙂
Thanks for the insights… they are very informative.
Glad you liked them, Arshad. Stay healthy and safe 🙂