Discover how "anchoring" bias can skew nonprofit risk management decisions and explore strategies to counteract this cognitive pitfall for more effective outcomes.
Risk management is important for many reasons. Governments need risk management because of their stewardship obligations: they have a duty to use public resources responsibly, which includes taking reasonable steps to avoid errors. For-profit businesses want to minimize loss and maximize revenues. As noted in my recent book, nonprofits have an even more challenging business model, and they often deal with target populations that are both at risk and may pose risks to themselves or others.
But there is a more basic truth at play that makes risk management critically important: the human brain is a flawed decision-maker.
We like to think of ourselves as economic “rational actors” who seek unbiased information, process it objectively, and make sound decisions based on these calculations. That view of human decision-making is no longer accurate considering 30 years of cognitive theory and behavioral economics research. Instead, experts overwhelmingly agree that human decision-making involves numerous biases and shortcuts that undermine optimal decisions.
This and upcoming posts will address the impact of numerous cognitive biases and decision-making shortcuts that impact our ability to identify, prioritize, and respond to risks. The posts will also provide recommendations for how nonprofit leaders can overcome these challenges and make effective decisions for their organizations.
“Anchoring” Bias
We will begin with “anchoring.” Anchoring bias is a tendency for a decision-maker to over-rely on the first piece of information encountered (the “anchor”) when making decisions. Once the anchor is set, we tend to adjust our subsequent judgments and estimates based on that initial reference point, often inadequately adjusting away from that anchor.
What does anchoring look like? We see it a lot in our work with nonprofits:
"When we first launched, our pilot program impacted 50 individuals, so I always have that number in my mind as our benchmark—even though our capacity and resources have significantly grown since then."
"The first proposal we received for the new building was $2 million. Even though subsequent proposals came in at different values, I kept comparing everything back to that initial $2 million figure."
"The initial feedback from our community survey was so positive; I found it hard to give equal weight to the more critical feedback that came in later."
"Our first hire for the project manager role was willing to work for a significantly lower salary. It’s challenging for me not to use that as a reference when considering compensation for his successor."
Anchoring is insidious because it can warp how a decision-maker interacts with new information—or even whether that new information is credited in any analysis. This can pose decision-making challenges in every functional area of a nonprofit. For instance,
Finance: If a nonprofit starts its budgeting process by looking at last year’s budget, this can serve as an anchor. While a common and sometimes efficient practice, this may prevent the organization from making necessary increases or cuts in certain areas based on current needs or changing circumstances.
Operations: Anchoring can lead a nonprofit to evaluate a new program's success based on initial expectations. For instance, if the initial prediction was that a program would help 100 people, but it helped 80, it might be seen as a failure—even if those 80 outcomes were deeply transformative. By contrast, without the initial anchor, helping 80 people might have been seen as a huge success.
Talent Management: If a nonprofit is hiring for a new position and receives information on a candidate's previous salary, that figure can act as an anchor. This might lead them to offer a salary based on that information rather than on the actual value or requirements of the position within their organization. This can result in overpaying or underpaying employees.
Collaboration: When collaborating with other entities or considering mergers, initial offers or valuations can act as anchors, potentially preventing the nonprofit from negotiating better terms.
Reputation Management: If a nonprofit releases preliminary data about a program, that initial information can anchor public perception. Even if later data shows different results, the public might still be influenced by the initial figures, potentially affecting the organization's reputation and credibility.
Of course, while the examples above use nonprofits, decision-makers across the business spectrum make the same mistakes all the time.
What To Do About Anchoring
To address the challenge of anchoring, consider the following simple steps:
Awareness and Education: The first step to mitigating any cognitive bias is being aware of its existence. Simply explain to your team that anchoring is a potential threat and encourage team members to call out potential anchoring during discussions and evaluations.
Diverse Input and Perspectives: Encourage group decision-making, as diverse perspectives can reduce the risk of being anchored to one idea or figure. Create diverse committees for essential tasks like budgeting, fundraising, and program evaluation. This is one reason why we urge nonprofits to use multiple team members when performing a risk inventory or engaging in risk prioritization.
Periodic Reviews: Schedule regular intervals to review decisions. This can help identify if the organization is anchored to outdated ideas or figures. Ensure that these reviews incorporate new data and changing circumstances. These reviews are incorporated into a lean risk management methodology, which notes that a risk management task force should regularly evaluate progress in responding to risks.
Implement Feedback Loops: Encourage staff, partners, and beneficiaries to provide feedback on decisions and strategies. This provides an opportunity to identify decisions that are anchored and make adjustments before negative consequences arise. Again, lean risk management achieves this by advising team members to engage in structured and incremental responses to risks, instead of attempting all-in “solutions.”
Continuous Improvement Culture: Cultivate a culture where continuous improvement is valued. This ensures that the organization is always open to revising strategies and decisions, rather than staying anchored to the past. This isthe “lean” in “lean risk management.”
External Benchmarks: Use external data and benchmarks rather than relying solely on internal historic data. For instance, when budgeting, look at the budgets of similar organizations or industry standards. For fundraising, benchmark against both past internal data and the current performance of similar organizations.
Use Blind Procedures When Relevant: For tasks like hiring, consider blind procedures where certain information (like past salaries) is hidden during initial evaluations to prevent anchoring. For program evaluations, consider blind reviews where evaluators don't know previous targets or expected outcomes.
Scenario Planning: Create multiple scenarios for planning exercises. This can help teams avoid being anchored to a single expectation and allows them to plan for a variety of outcomes.
Seek External Opinions: External consultants or advisory boards can provide an outsider's perspective, free from the organization's potential anchors. This is particularly useful in areas like risk management, strategic planning, fundraising goals, or assessing partnership terms.
Refine Communication Strategy: Be careful about how initial data or targets are communicated, both internally and to the public. Clearly label preliminary data as "preliminary" and ensure there's room to adjust expectations. Always ensure the most accurate and recent data is available and visible.
Document The Decision Rationale:
Whenever a significant decision is made, document the rationale behind it. This can be reviewed in the future to understand if the decision was anchored or if it was based on a comprehensive analysis.
Essentially, the main goal of overcoming anchoring bias is to create a decision-making environment that values multiple perspectives, relies on thorough analysis of current data and allows for flexibility to adapt as new information becomes available. By following this approach, nonprofits can significantly reduce the threat posed by the anchoring bias.