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Managing Biases in Strategic Judgment

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Managing Biases in Strategic Judgment
SEP 2012 Managing Biases in Strategic Judgment

Managing Biases in Strategic Judgment

Professor Ilya Strebulaev

© Ilya Strebulaev 2012

SEP 2012 Managing Biases in Strategic Judgment

© Ilya Strebulaev 2012

SEP 2012 Managing Biases in Strategic Judgment

Heuristics and Rules of thumb
• People rely on various heuristics when making most decisions
–Evolutionary reasonable strategy –Helpful but can lead to severe errors –Can result in biases –People are unaware of using heuristics most of the time –Why important to understand

• Can correct/debias yourself • Understand what others are doing in deciding on your actions/strategies

• Example: Recognition heuristic

–Which city has a large population

• Detroit vs Milwaukee: 86% for Detroit

• Seattle vs Chandzyan: 62% for Chandzyan

– Of those who attended U.S. High School: 55% – Detroit (#18; 714,000); Milwaukee (#28, 595,000)

© Ilya Strebulaev 2012

SEP 2012 Managing Biases in Strategic Judgment

Availability Heuristic
• Ease of recall/Retrievability
–Do more seven-letter words end with “ing” or have “n” in the 6th place?
• Average “n”: 21% • Average “ing” 27% • 77% responses: “ing”>”n”

• Events readily “available” in memory have disproportionate influence

–E.g.: Purchasing insurance after earthquakes –E.g.: Annual evaluation: last three months more important; bigger events more important than daily –E.g.: A subordinate who works in close proximity to the manager’s office is likely to receive a more critical review –E.g.: Successful investors are more likely to share experiences

© Ilya Strebulaev 2012

SEP 2012 Managing Biases in Strategic Judgment

Availability Heuristic

• Lesson: Ask yourself whether your recollections/data points which lead you to make a decision are truly representative of the relevant pool of information?

© Ilya Strebulaev 2012

SEP 2012 Managing Biases in Strategic Judgment • Lisa is thirty-three and is pregnant for the first

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