Here is a brief excerpt from an article written by Philip Meissner, Olivier Sibony, and Torsten Wulf for the McKinsey Quarterly, published by McKinsey & Company. To read the complete article, check out other resources, learn more about the firm, obtain subscription information, and register to receive email alerts, please click here.

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Before making an important decision, executives should ask themselves two sets of questions.

Good managers—even great ones—can make spectacularly bad choices. Some of them result from bad luck or poor timing, but a large body of research suggests that many are caused by cognitive and behavioral biases. While techniques to “de-bias” decision making do exist, it’s often difficult for executives, whose own biases may be part of the problem, to know when they are worth applying. In this article, we propose a simple, checklist-based approach that can help flag times when the decision-making process may have gone awry and interventions are necessary. Our early research, which we explain later, suggests that is the case roughly 75 percent of the time.

Biases in action

In our experience, two particular types of bias weigh heavily on the decisions of large corporations—confirmation bias and overconfidence bias. The former describes our unconscious tendency to attach more weight than we should to information that is consistent with our beliefs, hypotheses, and recent experiences and to discount information that contradicts them. Overconfidence bias frequently makes executives misjudge their own abilities, as well as the competencies of the business. It leads them to take risks they should not take, in the mistaken belief that they will be able to control outcomes.

The combination of misreading the environment and overestimating skill and control can lead to dire consequences. Consider, for instance, a decision made by Blockbuster, the video-rental giant, in the spring of 2000. A promising start-up approached Blockbuster’s management with an offer to sell itself for $50 million and join forces to create a “click-and-mortar” video-rental model. Its name? Netflix. As a former Netflix executive recalled, Blockbuster “just about laughed [us] out of their office.” Netflix is now worth over $25 billion. Blockbuster filed for bankruptcy in 2010 and has since been liquidated.

In retrospect, it is easy to ascribe this decision to a lack of vision by Blockbuster’s leadership. But at the time, things must have looked very different. Netflix was not, then, the video-on-demand business it has since become: there were nearly no high-speed broadband connections of the kind we now take for granted, and widespread use of video streaming would have seemed like a futuristic idea. In Blockbuster’s eyes, Netflix, with its trademark red envelope, was merely one of several players occupying a small (and thus far unprofitable) mail-order niche in the video business.

Furthermore, this was the very time when the dot-com bubble had burst: as the Nasdaq Composite Index quickly collapsed from its March 2000 high, many managers of traditional companies felt vindicated in their belief that investors had grossly overestimated the potential of Internet-based models. Through the lens of the confirmation bias, Blockbuster’s executives likely concluded that the approach Netflix had made to them was evidence of its desperation. And it did not take a lot of overconfidence for them to assume that they could replicate Netflix’s mail-order model themselves, should they ever decide to do so.

The overconfidence and confirmation biases weren’t the only ones at work at Blockbuster, of course, just as in most organizations. But they are important enough to warrant special attention.

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Here is a direct link to the complete article.

Philip Meissner is an assistant professor of strategic and international management at the Philipp University of Marburg, Germany, where Torsten Wulf is a professor and chair of strategic and international management. Olivier Sibony is an alumnus of McKinsey’s Paris office.