Managerial Decision Making - Biases

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Managerial Decision Making

Kristen Betts

March 27, 2011

There are several biases that affect the judgment of managers, however, here are just a few that are relatively common; availability heuristic, representativeness heuristic, the affect heuristic and the positive hypothesis testing. It is truly intriguing to understand how each of them affects reasoning and judgment. The Availability heuristic is when individuals look for frequency of information, likely causes or even probability to an event and it occurs quickly and readily available in their memory. An occurrence where emotions are involved will be easier to retrieve than one without emotion. Events that happen with more frequency are also easier to retrieve since they are easily remembered. Another bias is called the Representativeness heuristic in which people will look for similar traits which relate to stereotypes already formed. Managers use this bias by analyzing an employee’s traits, experience and performance by placing them in a category of other individuals who have fit the same mold. This can be very useful but it can also create false biases where discriminations can be called to play unintentionally. Positive Hypothesis Testing occurs when people analyze a situation by basing on their previous experience of either being in that situation before or knowing of that situation occurring. This brings about conclusions being made without evidence being present. This brings about another group of biases. The Confirmation bias is where individuals “will search for and interpret evidence in a way that supports the conclusions we favored at the outset.” (Bazerman, p.9) Anchoring can also be brought about when the answer is based on a set of information that sways judgment. Overconfidence and Hindsight biases occur when a person believes too highly in how accurate their beliefs are and when asking how things could have turned out, respectively.

The questions for the surveys I chose were from Max Bazerman and Dan Moore’s book, Judgment in Managerial Decision Making. Within Chaper 2, Common Biases, I chose to use Problems 1, 2, 5, 9 and 10 (surveys used are attached at the end of the report). In Table 1.1 and 1.2 you will see the summarized results of the surveys taken. Table 1.2 displays cells in gray to indicate those answers that were changed after I explained to the subjects the biases that exist. Please reference Survey #1 at the end of this report. Question 1 (please rank in order the following causes of death in the United States between 1990 and 2000) relates to the Availability Heuristic in which people will make their selections based on those options they have seen or heard of most recently. The media is very good at skewing our judgment by highly publicizing negative events such as murders, car accidents, drugs and etc.

Question 2 (estimate the percentage of words in the English language that begin with the letter “a”), uses the Retrievability bias which is based on memory structures. As the question is read, people will go use their memory to come up with an estimated percentage of how many words begin with the letter a. Some came very close to answering this question correctly. Question 3 (For a period of one year, each hospital recorded the days on which more than 60% of the babies born were boys. Which hospital do you think recorded more such days?) is relative to the sample size given in the question. It would be sensible to think that both hospitals would have the same percentage of boys, however, the smaller the sample size the higher the percentage. This bias is used in marketing and advertising when references to sample sizes are made to make consumers think the product is highly recommended without offering the total sample size. Question 4 (take the last three digits of your phone number and add the number one to the front of the string, so that you now have four digits) is relative to...
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