Management

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FUNDAMENTALS OF MANAGEMENT

Question 1
(a) Identify and explain eight of the twelve decision-making biases that managers may exhibit. Provide relevant examples to illustrate your answer.

When managers make decisions, not only do they use their own particular style, but many also use “rules of thumb” or heuristics, to simply their decision making. Rules of thumb can be useful to decision makers because they help make sense of complex, uncertain and ambiguous information. Even though managers may use rules of thumb, that doesn’t mean those rules are reliable. Why? Because they may lead to errors and biases in processing and evaluating information. Here are the common decision errors and biases that managers make.

Overconfidence bias is when decision makers tend to think they know more than they do or hold unrealistically positive views of themselves and their performance. Most managers overestimate their ability to predict uncertain outcomes. Before making a decision, managers have unrealistic expectations of their ability to understand the risk and make the right choice. For example, a manager holds the positive views about him and always thinks that he knows everything, he can never be wrong and similarly the decision that he is going to make will generate the desired results whether it may be actually not be true.

Anchoring effect bias describes when decision makers fixate on initial information as a starting point and then, once set, fail to adequately adjust for sub subsequent information. First impressions, ideas, prices and estimates carry unwarranted weight relative to information received later. Anchors can be as simple as a random comment by a colleague or a statistic read in a newspaper. Past events and trends also act as anchors. For examples, in business, managers frequently look at the previous year’s sales when estimating sales for the coming year.  If a salesperson attempts to forecast...
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