UNIT II STUDY GUIDE Overcoming Bias in Decision-Making Course Learning Outcomes for Unit II Upon completion of this unit, students should be able to: 2. Examine the rational decision-making process. 2.1 Describe biases emanating from the availability, representativeness, and confirmation heuristics that affect rational decision-making. 2.2 Apply a heuristic bias to a decision-making scenario. 7. Discuss the methods for improving managerial decision-making. 7.1 Explain how overcoming heuristics can improve a decision. Course/Unit Learning Outcomes 2.1 2.2 7.1 Learning Activity Unit Lesson Chapter 3 Unit II Essay Unit Lesson Chapter 3 Unit II Essay Unit Lesson Chapter 3 Unit II Essay Reading Assignment Chapter 3: Common Biases Unit Lesson Overcoming Bias in Decision-Making Rational decision-making is based on a theoretical model. This model assumes that decision makers have three qualities when making decisions. The qualities include being rational, decisive, and able to maximize. They must have the ability to apply reason in their thought process and then exercise good judgment in the decision. Rational decision makers must have the ability to place a value on everything, and they must have preferences that provide direction in their choices. We will discuss preferences in Unit III. Rational decision makers work to maximize their decisions to achieve the highest rewards at the least cost (particularly the things about which they care the most). Ideally, we follow a simple model, but in reality, there are events and circumstances that can complicate the decision process. There also can be limits on available information or the quality of that information. The information may be both quantitative and qualitative in nature and can be objective as well as subjective. Because of a variety of factors, we may choose to make a satisfying decision versus a maximizing decision and have to settle for good rather than great. The process of rational decision-making should follow a process that takes you through a sequence of steps that leads you to your conclusion. This is true whether one takes a formal, rigorous, and highly analytical approach or a more informal, cursory, and less methodical one. Of course, the higher the stakes or the more consequential the decision, the more effort and thought should go into making it. Consider that we generally do not conduct a great deal of analysis before deciding what to eat for lunch, but most people spend time doing research and making comparisons when choosing a new car. BBA 3826, Managerial Decision Making 1 Decision Criteria UNIT x STUDY GUIDE Title Decisions are made against a set of criteria, the factors that are relevant, and important aspects of the choice. Listing the criteria that matter to you creates a way to consider the options. Establishing your criteria before you are faced with a choice can alleviate the time pressure that may come when your decision has a short deadline, which can inhibit your ability to make a good decision. The process of identifying criteria also helps clarify what you will value most. Prioritizing in rank order the criteria you select can help you make the decision that maximizes the outcome for you. The majority of the criteria will be things that can be quantified. Even criteria that do not have a number associated with them can still be described in objective terms and be considered rationally. Rather than being represented on a numeric or interval scale, this criterion can be described in terms of high and low on an ordinal scale. Selecting Alternatives Without alternatives, there would be no decision to make. Based on the goal, a decision process includes the search for a range of options to consider. It may be as simple as “go/no go” in the case of a new product launch, or there may be a large number of options as is the case for decisions on where to place ads as a part of a marketing campaign. The range of options available when choosing to accept a job offer is the result of a prior set of decisions about which ones to apply for and pursue. Even if you have only one offer, you still have the choice of whether to take it or not. Depending on how many choices you have, the time to verify that a job matches the goal you have established is before you make a decision. If it does not, you might consider eliminating it from the options you consider. Analyzing Alternatives Analyzing the alternatives against the set of criteria is the next step in making a decision. This step involves collecting data and information for each alternative that relates to the criteria. The criteria can also serve as the basis for the questions you should ask during your decision process. This is another reason to be clear about what matters to you before you reach a decision point. Once you have comparable data for the alternatives, you can see which scores highest or is most preferable on each criterion. A helpful tool for doing this is a simple spreadsheet that arrays the alternatives in the top row and the criteria in the first column. Following the rational choice model, the decision should be the alternative that provides the highest value on the most important criteria. Decision Feedback After you have made a decision, how do you know if it is the right one? In time, feedback will come in the form of results. After a while, you will have more and better information about how the decision you made actually rates on the criteria you selected. The closer the fit, the more satisfied you are likely to be since the decision is meeting your expectations. This is confirmation that your choice was the right one. Alternatively, you may find your satisfaction of the decision is not very high, and you may have to change your decision to better satisfy your needs, goals, and desires. Common Biases Everyone has biases. Every day we go about making decisions, and all those decisions are affected in one way or another by our biases. As we noted in Unit I, people use heuristics, or shortcuts, to help lessen the mental load in decision-making. Heuristics take the work out of decision-making. Using heuristics makes it simpler for us to take what we know and apply it. It is also less thought-provoking when we have fewer pieces of information to examine. It makes decision-making easier and less complicated if we do not have to weigh too much information and if we have less information to process. We end up considering fewer alternatives in the decision-making process. However, not being aware of our biases may lead to bad decisions (Bazerman & Moore, 2013). Three General Heuristics There are three of the general heuristics we introduced in Unit I that we will expand on in this unit, including the availability heuristic, the representative heuristic, and the confirmation heuristic. The three heuristics covered in this unit encompass 11 specific biases. In this unit, we will help you overcome biases in your BBA 3826, Managerial Decision Making 2 decision-making process by presenting information about heuristics and how they be improperly UNITcan x STUDY GUIDE applied when you are making decisions. Be sure to answer the 11 problems as you read Chapter 3 so you can see Title how biases play a big part in decision-making. We remember major events like war because of the frequency of exposure and vividness of the events. (Raustadt, 2007) The availability heuristic: The availability heuristic can be broken down into two categories of bias: ease of recall and retrievability. Ease of recall is based on vividness and recency; vividness is illustrated in the textbook by ranking death causes from highest to lowest. The textbook talks about the vivid memories and the frequency of exposure for things like war, drought, famine, and gun-related deaths of young people. This is especially true if it fits the agenda of the news outlet covering the event. These types of events get a lot of media coverage from television; radio; and online media, such as Facebook, Twitter, and Snapchat. There is much less coverage and sensationalism if the event is caused by disease or if sanctioned by a law (Bazerman & Moore, 2013). The vividness of the information also plays a role in our decisions. Another example is highlighted in the textbook about the shoe-bomber Richard Reid (Bazerman & Moore, 2013). Today, every time we travel through the airport, we have to go through a ritual of removing our shoes because of this one incident in 2001 that changed air travel for all of us. The tragedy on September 11, 2001, changed air travel even more and stays as a vivid memory in most people’s minds even today. Basically, the availability heuristic causes us to have biases because of stored common event information and how easy it is to remember those events when we are making decisions that relate to the same or similar events. Also classified under the availability heuristic is the recency of events bias (Bazerman & Moore, 2013). Many of us can recall who won the national college football championship this past January, but we may have a hard time recalling who won the championship the year before. The textbook discusses actions that tempt fate. When this type of event happens, we generally think of the negative outcomes rather than what possible positive outcomes could occur. This bias is referred to as the differential availability bias, and it affects our decision-making (Bazerman & Moore, 2013). The textbook gives an example of people buying insurance after an event like a hurricane or earthquake although the likelihood of another such event decreases after the event occurs (Bazerman & Moore, 2013). Retrievability based on memory structures is based on how our mind works and how it organizes and processes information. The examples in the textbook cover words in the English language and the commonality of certain words, retail store locations, and manager-hiring strategies. All three of these examples of biases highlight retrievability based on memory structure and how it affects our decision-making. The way we use the availability heuristic can cause us to make poor management decisions. The things we readily remember may not be representative of a much larger group of alternatives that are outside our limited paradigms. What we need to learn from this information is not to let our intuition control how we limit the available options or choose an alternative that is less than optimal (Bazerman & Moore, 2013). Click here to test your knowledge of the availability heuristic. Be sure you have reviewed Chapter 3 before taking this quiz. BBA 3826, Managerial Decision Making 3 The representativeness heuristic: The representativeness heuristic can be broken into five categories UNIT x down STUDY GUIDE of bias, which are listed below. Title 1) Insensitivity to base rates 2) Insensitivity to sample size 3) Misconceptions of chance 4) Regression to the mean 5) The conjunction fallacy Insensitivity to base rates means that we tend to ignore the base rate information that causes us to make incorrect decisions. The textbook gives three different examples of how the base rate is ignored: the chances of having a baby with Down syndrome; a comparison of lawyers versus engineers with the likelihood of one versus the other liking puzzles; and the likelihood of success of an entrepreneur. These three examples highlight how the base rate is ignored in the different scenarios (Bazerman & Moore, 2013). Insensitivity to sample size refers to making decisions based on a small sample size compared to a large sample size. The best example refers to the flip of a coin. You can observe this application by doing this experiment yourself. Take a coin, flip it three times, and record the results. Now, take the coin, flip it 50 times, and record the results. The much larger sample will always record a smaller percentage or heads versus tails than the smaller sample size. The smaller sample size will usually give you a higher percentage of heads versus tails than a larger sample of the same experiment (Bazerman & Moore, 2013). However, most people judge the probability to be close to the same regardless of sample size. A misconception of chance refers to people not understanding the randomness of chance. The example in the textbook best illustrating this concept shows that people expect a sequence of random events to look random. Please review the example in Chapter 3 of the textbook that explains the randomness of a flip of a coin six times in succession. With each flip of the coin, there is a 50-50 chance of getting heads. There is no way to accurately predict the outcome of random events. We use our misconception of chance bias to make judgments that are just guesses because the outcome is totally a random event (Bazerman & Moore, 2013). We often think that chance is a self-correcting process, but it is not. In a random event like a coin toss, there is no self-correcting process in effect. We have a misconception of connectedness when, in fact, chance is actually in effect (Bazerman & Moore, 2013). When flipping a coin three times, is it more likely to get heads all three times or tails at least once? Misconceptions regarding chance tell us that both scenarios are equally likely. (Mun, 2013) Regression to the mean is referring to the misconception that the current situation will remain relatively the same with no increase or decrease in outcome. Mean refers to a mathematical expectation or an average. The example in the textbook challenges you to make predictions of the batting average of a baseball team for next year based on the batting average of the team this year. We tend to think that the player with the best batting average will stay close to the same batting average next year, but in reality, each individual on the team most likely will perform better or worse than last year. The result is that some players regress to the mean (or average) while others exceed the mean, so, as a group, they will create a new mean (or average) BBA 3826, Managerial Decision Making 4 next year that could be higher or lower than the previous year. This is true for UNIT baseball playersGUIDE as well as x STUDY corporations (Bazerman & Moore, 2013). Title The conjunction fallacy is based on how we perceive the likelihood of a single component descriptor versus a combination of component descriptors. Our mind associates the combination of two or more component descriptors (a conjunction) as more likely than the single component descriptor by itself; however, the conjunction cannot be more likely than any of its descriptors (Bazerman & Moore, 2013). The bias of the conjunction fallacy happens when there is a greater availability in our minds of the conjoined events versus any of the unique single descriptors alone. Our mind will associate matches to recent or more vivid activities and lead us to false assumptions that the conjoined event is more likely than the single event (Bazerman & Moore, 2013). We have examined five biases that emanate from the use of the representativeness heuristic. The representativeness heuristic can often serve us well. After all, the likelihood of a specific occurrence is usually related to the likelihood of similar types of occurrences. Unfortunately, we tend to overuse this simplifying heuristic when making decisions. The five biases we have just explored illustrate the systematic irrationalities that can occur in our judgments when we are unaware of this tendency (Bazerman & Moore, 2013). Click here to test your knowledge of the representativeness heuristic. Be sure you have reviewed Chapter 3 before taking this quiz. The confirmation heuristic: The confirmation heuristic can be broken down into four categories of bias, which are listed below. 1) Confirmation trap bias 2) Anchoring bias 3) Conjunctive and disjunctive events bias 4) Hindsight and the curse of knowledge bias The confirmation trap is explained by the way information is gathered; we move toward data that confirms what we expect or that supports our theories while we stray from information that does not confirm our theories or expectations. We desire confirmation of our beliefs and tendencies (Bazerman & Moore, 2013). There are two reasons that we fall prey to the confirmation trap. One is based on how our mind retrieves information from memory and the second is how our mind searches for information from memory. Because of time and attention limits, our brain is very selective in its search and retrieval process. We tend to search and find information that supports the conclusion we want to reach. Now that we are aware of the confirmation trap bias, we need to mentally force ourselves to think broader and look for more alternatives than the ones that come readily to our minds. Our natural tendency is to believe the things that confirm our expectations, and preventing the confirmation trap takes a lot of effort (Bazerman & Moore, 2013). BBA 3826, Managerial Decision Making 5 When we meet people for the first time, our first impression, or anchor, lingers and makes it difficult to change our opinion about the person. This is an example of the anchoring bias. The anchoring bias refers information being UNIT xtoSTUDY GUIDE provided, whether relevant Title or not to a situation, and using that information as a starting point or anchor to make a decision. The two reasons noted in the textbook that explain how anchoring affects our decisions are associated with, first, how we start the decision process and, second, how we look for consistency in the information. The first explains how we develop estimates by starting with known information (the anchor). We then adjust from the anchor based on additional data available to come to our final decision. Once we have taken the anchor as our starting point, it becomes the basis as we look for consistency in the decision-making process. We really do not look for other information that is inconsistent with the anchor (Bazerman & Moore, 2013). (Coburn, n.d.) The conjunctive and disjunctive events bias refers to the tendency of decision makers to make too high of an estimate when events are combined versus making too low of an estimate for single events (Bazerman & Moore, 2013). We tend to overestimate the chances of a something happening when multiple events need to occur; on the flip side, when a single event of many needs to occur, we underestimate the odds that it will happen. Refer to the two examples in the textbook (one about drawing different color marbles out of a bag and the second about the chances of catching a flight) to get a clear understanding of the conjunctive and disjunctive events bias. The hindsight and the curse of knowledge bias is broken down into two separate descriptors. The hindsight bias often happens when people refer to historical decisions made by themselves or others. Our intuition is sometimes accurate, but we often overestimate our prior knowledge based on what we find out later. This bias has advantages and disadvantages. Most people believe their judgment is better than others and tend to overvalue their own opinions and undervalue other people’s opinions. We generally like to pump up our own egos while wondering why others did not think through some of their decisions that turned out badly. We need to learn from this bias not to judge others too quickly and to really think through our own decisions very carefully in order to learn from the bad decisions made by ourselves and/or others (Bazerman & Moore, 2013). The curse of knowledge bias has to do with the mindset that you cannot ignore the knowledge you have stored about the subject at hand. You cannot easily forget what you have learned and stored; therefore, it is retrieved automatically. Then, your mind starts making all of the arguments that your retrieved information supports. Your ego will not let you make a fair assessment of the information unless you control the curse of knowledge and are willing to absorb new or better information to help make a better decision. This happens all of the time in the business world because of poor communications that end up with misunderstandings, confusion, and bad decisions. Diversity has become the key to better business and better decisions. The differences in people and the combined knowledge when shared in a diverse group help broaden the alternatives and the discussion, which can lead to better decisions (Bazerman & Moore, 2013). Click here to test your knowledge of the confirmation heuristic. Be sure you have reviewed Chapter 3 before taking this quiz. Summary of Overcoming Biases in Decision-Making As we noted earlier, heuristics are rules of thumb that we use in day-to-day decision-making. This process simplifies the decision-making process for us but can also lead to bad decisions if not properly controlled. Many heuristics can be happening simultaneously in our very powerful computer that we call the brain. We have to be careful not to let our biases ingrained in our heuristics lead us into making poor decisions. We may have saved time in making a quick decision, but the consequences of a poor decision may far outweigh the BBA 3826, Managerial Decision Making 6 savings from not taking the time to evaluate more alternatives before we madeUNIT the decision x STUDY(Bazerman GUIDE & Moore, 2013). Title The other factor we might miss by relying on our heuristics is the quality of the decision and the resulting outcomes. Although decisions come naturally to most of us and we become comfortable in our own decisions, we need to get more used to being more uncomfortable by opening up to more than our current paradigm wants to allow. The bottom line is for us to be aware of our biases and make an effort to overcome them in our decision-making process. References Bazerman, M. H., & Moore, D. A. (2013). Judgment in managerial decision making (8th ed.). Hoboken, NJ: Wiley. Coburn, S. (n.d.). Business introduction [Photograph]. Retrieved from www.dreamstime.com Mun, M. (2013). Hand ready to flip coin [Photograph]. Retrieved from www.dreamstime.com Raustadt, D. (2007). Three army war tanks in desert [Photograph]. Retrieved from www.dreamstime.com BBA 3826, Managerial Decision Making 7
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