Common Biases and Errors in Decision-Making Process

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In addition to engaging in bounded rationality, an accumulating body of research tells us that decision makers allow systematic biases and errors to creep into their judgments. These come out of attempts to shortcut the decision process. To minimize effort and avoid difficult trade-offs, people tend to rely too heavily on experience, impulses, gut feelings, and convenient “rules of thumb.â€? In many instances, these shortcuts are helpful. However, they can lead to severe distortions from rationality. The following highlights the most common distortions. Overconfidence Bias: It’s been said that “no problem in judgment and decision making is more prevalent and more potentially catastrophic than overconfidence.â€? When we’re given factual questions and asked to judge the probability that our answers are correct, we tend to be far too optimistic. For instance, studies have found that, when people say they’re 65 to 70% confident that they’re right, they were actually correct only about 50% of the time. And when they say they’re 100% sure, they tended to be 70 to 85% correct. From an organizational standpoint, one of the more interesting findings related to overconfidence is that those individuals whose intellectual and interpersonal abilities are weakest are most likely to overestimate their performance and ability. So as mangers and employees become more knowledgeable about an issue, the less likely they are to display overconfidence. Overconfidence is most likely to surface when organizational members are considering issues or problems that are outside their area of expertise. Anchoring Bias: The anchoring bias is a tendency to fixate on initial information as a starting point. Once set, we then fail to adequately adjust for subsequent information. The anchoring bias occurs because our mind appears to give a disproportionate amount of emphasis to the first information it receives. So initial impressions, ideas, process, and estimates carry undue weight relative to information received later. Anchors are widely used by professional people such as advertising writers, managers, politicians, real estate agents, and lawyers—where persuasion skills are important For instance, in a mock jury trial, one set of jurors was asked by the plaintiff’s attorney to make an award in the range of Rs. 5 million to Rs. 25 million. Another set of jurors was asked for an award in the range of Rs. 25 million to 75 million. Consistent with the anchoring bias, the median awards were Rs. 5 million versus Rs. 25 million in the two conditions. Consider the role of anchoring in negotiations and interviews. Any time a negotiation takes place, so does anchoring. As soon as someone states a number, your ability to objectively ignore that number has been compromised. For instance, when a prospective employer asks how much you were making in your prior job, your answer typically anchors the employer’s offer. Most of us understand this and upwardly “adjustâ€? our previous salary in the hope that it will encourage our employer to offer us more. Anchoring can distort employment interviews. The initial information you might get interviewing a job candidate is likely to anchor your assessment of the applicant and unduly influence how you interpret information that you obtain later. Confirmation Bias: The rational decision-making process assumes that we objectively gather information. But we don’t. We selectively gather information. The information bias represents a specific case of selective perception. We seek out information that reaffirms our past choices, and we discount information that contradicts past judgments. We also tend to accept information at face value that confirms our preconceived views, while being critical and skeptical of information that challenges these views. The information we gather is typically biased toward supporting views we already hold. This confirmation...
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