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Block 10: Bias and Decision Making - Coggle Diagram
Block 10: Bias and Decision Making
Rational Decision Making
Prescriptive Theories (Economists):
Rational Actor Model
: Assumes decision-makers are fully rational, with complete information and the ability to evaluate all possible options.
Utility Maximization:
Decision-makers assess all possible actions, their consequences, and outcomes.
They assign a utility (value) to each outcome based on their preferences and choose the option with the highest utility.
Example
: Choosing a mortgage involves evaluating interest rates, repayment terms, and personal financial stability.
Limitations:
Cognitive limitations make this model impractical for complex decisions.
Suitable only for simple, repetitive decisions where all variables are known (e.g., mortgage approvals).
Bounded Rationality (Descriptive Theories):
Simon (1960)
: Introduced the concept of
bounded rationality
, which acknowledges that decision-makers have limited cognitive resources and information.
Satisficing Behaviour:
is a decision-making strategy where individuals choose the first option that meets a minimum acceptable threshold rather than seeking the optimal solution. It balances effort and outcomes by accepting "good enough" results." (satisfactory).
Example
: hiring could be in the resume screening when a recruiter skims 200 applicants, stopping at the first 10 candidates that meet basic qualifications e.g., 5+ years of experience, relevant degree.
why do it ?
they may not get any better candidates.
Ten candidates have most of the skills the manager is looking for.
Satisficing enables decisions to be made in shorter time, the manager may need this member of staff urgently, for example, if replacing a member of staff that is leaving the firm.
Implications
: Managers often make decisions based on incomplete information, leading to suboptimal but practical outcomes. missed talent & Bias Reinforcement
Stages in Decision Making
Process:
Recognize a Problem or Opportunity
: Identify the need for a decision.
Set Objectives
: Define what you want to achieve.
Set Weights and Decision Criteria
: Determine the importance of different factors.
Develop Alternatives
: Generate possible solutions.
Implement the Chosen Alternative
: Execute the decision.
Evaluate Effectiveness
: Assess whether the decision achieved the desired outcome.
Examples:
Mortgage Approval:
A rational, rule-based decision where the bank evaluates income, property value, and loan amount.
The decision can be automated using algorithms.
Honeymoon Planning:
A complex decision involving qualitative factors like personal preferences, weather, and budget.
Cannot be easily automated due to the subjective nature of the decision.
Short-Cut Thinking and Biases
Heuristics
or rule of thumb: Mental shortcuts that simplify decision-making but can lead to systematic errors (biases). (999 instead of 1000)
While such short-cut enables quick judgements based on experience and efficient problem-solving, it simultaneously introduces predictable cognitive biases that can distort managerial decisions.
Short-cut thinking (heuristics) offers several critical advantages that make it indispensable for managerial effectiveness, particularly in complex, time-sensitive business environments.
Enhanced Decision Speed and Efficiency
Heuristics enable managers to bypass exhaustive analysis and arrive at workable solutions quickly. In fast-moving industries, this rapid cognition can mean the difference between capitalizing on opportunities and missing them entirely.
Example: A retail manager uses the availability heuristic to quickly increase stock of umbrellas during a sudden weather forecast shift
Reduced Cognitive Overload
By filtering excessive information, heuristics help managers avoid analysis paralysis—a common pitfall when facing data-rich, ambiguous situations.
Example: An HR director shortlists job candidates by prioritizing applicants from three top-ranked business schools
While heuristics enhance efficiency, they systematically introduce predictable errors that can undermine strategic outcomes.
Cognitive Biases and Systematic Errors
Heuristics often manifest as hardwired biases that distort judgment:
Example 1 (Anchoring): A CFO estimates next year's budget by adjusting the current year's figures (+5%), ignoring market evidence requiring a 15% reduction
Example 2 (Confirmation Bias): A product manager champions a failing innovation, selectively referencing positive user feedback while dismissing critical market research (confirmation bias).
Oversimplification of Complex Issues
Ignore base rates: A startup assumes its app will achieve Uber-like adoption because "the concept feels similar (representativeness heuristic), neglecting market saturation data.
Overvalue recent events: Post-pandemic, a hotel chain over-invests in contactless tech despite declining consumer concern (availability heuristic).
Common Biases:
Anchoring:
Decisions are influenced by an initial reference point (anchor).
Example
: If you see an office where
the rent is £50,000 per month, and then another where it is £7,500, the second seems very cheap. However, if the average price of office rental in the area is £6,000, then it is still very expensive.
Anchoring by Suggestion:
Anchoring occurs when an initial piece of information (often a number) influences subsequent judgments, even if the information is irrelevant.
Anchoring by Adjustment:
When people are given an initial figure, they adjust their estimates based on it, but often fail to adjust sufficiently. This means their final estimate remains close to the initial anchor.
Availability Bias:
Over-reliance on information that is easily recalled (because of the media which is often unreliable)
Example
: As a manager, when you are undertaking a yearly performance review, it can be very easy to focus on what comes readily to mind about the person, but this may be information that is particularly positive, particularly negative, or something that has happened very recently. As such, the availability bias means that a manager is less likely to provide a well-rounded appraisal of performance if they rely on their memory alone
negative impact on a manager appraising the performance of an employee:
Focus on what comes readily to mind about the person, but this may be information that is particularly positive, particularly negative, or something that has happened very recently.
As a manager, the availability bias is particularly problematic because you will routinely be called on to make critical decisions in the moment based on what you think you know.
Can negatively affect a manager because it can lead to misassumptions and poor performance management, perhaps praising those who are worse than the manager thinks or punishing those who are better, not gaining a view of what is ‘really’ going on.
Overconfidence and Optimism Bias:
Tendency to underestimate risks and overestimate benefits.
Example
: Managers often underestimate project costs and timelines (planning fallacy).
leads to for poor decisions the 'planning fallacy'. This is a tendency for people to systematically underestimate the costs and overestimate the benefits of a proposal
As a manager
overconfidence could be a problem in an exceptionally wide range of ways, from thinking that you are a better leader than you are, to underestimating the time and money needed to complete a project, to over-rating your performance in your appraisal. It is a bigger problem for men on the whole, who are shown in a number of research papers to be slightly more likely to fall prey to the overconfidence bias than women
Loss Aversion:
People prefer avoiding (make-up) losses over acquiring gains.
Example
: Investors hold onto losing stocks to avoid realizing a loss, even when selling would be rational.
Value gains and losses differently (risk averse when dealing with gains and risk seeking when dealing with losses)
This effect can make managers turn down very favorable opportunities, rather than risk losing a small amount of their departmental budget. The potential pain of the loss overwhelms the brain’s processes and may prevent the manager from making a rational investment. (they are more concerned with preserving the status quo rather than risking change "sticking with what they have")
Confirmation Bias:
Seeking information that confirms pre-existing beliefs. and extends to only trusting information sources that confirm the pre-determined opinion mistrust sources that tell us otherwise (interpretation and recall of information that confirms what we already believe to be true.)
Example
: When managers are thinking about which countries to target and which to avoid for a new sales push, they will often ignore evidence which contradicts their view of which countries will be worthwhile and which will not.
It's important as a manager to be open to evidence which stands against your views, so that you are able to view problems from a wide range of perspectives. It is a good reason, also, to have a diverse team in place as they are more likely to bring wide-ranging views to discussions and decisions. A key problem with this bias is that we learn nothing, facts and information are found to support our desired outcome and confirm our opinion. This further entrenches this view in our mind.
Can also lead to "attitude polarization" where each one with opposing views move apart
Debiasing Strategies
Accountability:
Explaining decisions to others can reduce bias by encouraging more careful consideration.
BUT can place excessive emphasis on justifying decisions which can mean that some people double-down and become even more entrenched in their perspective.
Incentives:
Offering rewards for accurate decision-making can motivate people to avoid biases.
BUT it can be hard to identify precisely what should
be incentivized in order to reduce the bias. (BLOCK 4??)
Consider the Opposite:
Actively seeking evidence that contradicts your beliefs can reduce confirmation bias.
It’s difficult to determine how much opposing information should be taken into account.
When people are deeply entrenched in their views, they may dismiss the idea of considering the opposite as unnecessary or even absurd.
Failing to find contradictory evidence doesn’t mean it doesn’t exist, but the absence of such evidence can reinforce confidence in the original view, potentially leading to overconfidence and flawed decision-making.
Take the Outside View:
Using external data and benchmarks to inform decisions, rather than relying solely on internal information.
BUT it uses statistical methods, so needs reliable data and can be costly and time consuming as a result. In situations of high importance, the effort may be worthwhile.
Training:
Teaching employees to recognize and avoid biases through workshops and simulations.
BUT involves significant time and costs to develop and deliver effective training and feedback. One interesting application of this approach is
Virtual Reality
debiasing training
Pre-Mortem:
Imagining potential failures before starting a project to identify risks and mitigate overconfidence.
Groupthink can negatively impact group decision-making by discouraging dissenting opinions and leading to conformity, which undermines the quality of decisions.
External factors are often difficult to identify and interpret, making it challenging to fully anticipate potential risks or failures, even when using strategies like a pre-mortem.
BUT it may not always deliver the desired benefits due to the complexity of external influences and group dynamics.
Decision Analysis:
Breaking complex problems into smaller, manageable parts to improve decision-making.
BUT it follows prescriptive decision-making processes and not all complex problems can be reduced to routine analysis.
Group Decision-Making:
Leveraging diverse opinions to reduce individual biases and improve decision quality. "wisdom of the crowd" Block 5 diversity makes it that more blind spots can be considered
BUT people may be unwilling to voice their view for fear of criticism, and may be influenced by other group members (Groupthink). Extra preparation can be used to gather individual contributions before the meeting is held to reduce this risk, but it adds time to the process.
Used to outsmart biases that affect each one, which is not easy managers need to find ways to challenge themselves in order to expose themselves when they are falling in a bias trap
Common Biases in Business
Anchoring
: Influencing negotiations with initial figures (e.g., setting a high initial price to anchor the discussion).
Availability Bias
: Over-reliance on recent or memorable information (e.g., focusing on recent successes in performance reviews).
Overconfidence
: Underestimating risks and overestimating abilities (e.g., CEOs overestimating their ability to predict market trends).
Loss Aversion
: Avoiding risks to prevent losses, even when gains are likely (e.g., refusing to invest in new technologies due to fear of failure).
Confirmation Bias
: Ignoring evidence that contradicts pre-existing beliefs (e.g., only reading articles that support your investment strategy).