Decision-Making Biases and Pitfalls

Bolland & Fletcher (2012) argues that everyone is prone to personal biases one time or another. The authors further point that the personal biases often lead to bad decisions. Personal biases can even lead the most intelligent manager into a trap that leads to decisions which are wanting. However, these decisions seem quite logical at the time of making them. In the background materials Hammond, Keeney & Raiffa (2008), Bolland & Fletcher (2012) and Kourdi (2003), a number of specific decision-making biases are discussed. Some of the biases discussed include confirmation (self-confirming) bias, overconfidence bias, sunk-cost bias, hindsight bias and framing bias.

Confirmation Bias

Confirmation or self-confirming bias refers to a situation in which a person uses facts and data to selectively affirm their views. It is the tendency to seek out information that strengthens or confirms an individual’s held beliefs. The bias is brought about by the fact that the human memory is skewed to recall memories that confirm prevalent feelings and thoughts (Kourdi, 2003). For example, a business manager may be believing that marketing is not necessary because it is a waste of the organization’s money. Such manager can cite data from the past which indicate that sales did not increase despite high spending on marketing. In this case, the manager is looking for information to confirm is previously held belief about the role of marketing.

Overconfidence Bias

Bolland & Fletcher (2012) define overconfidence bias as an error made when calculating statistical probabilities. Overconfidence arises when someone has a higher confidence of his/her abilities which his/her actual skill set and experiences cannot support. In my previous company, the management thought that the company’s past successes and experience could beat innovations. For example, a manager plans to purchase another company in order to expand to new markets. His top managers advise him that it could cost the firm a lot of debt to finance the merger, and many such attempts have failed in the past. The manager insists that his plan will not fail this time and that they will overcome all odds. This is overconfidence bias because the manager has too much confidence in his abilities even when experience shows otherwise.

Hindsight Bias

Also known referred to as the “knew-it-all-along effect”, hindsight bias is the tendency to see past results as easily predictable even when they were not foreseeable. This bias makes people view events as more predictable than they actually are. People easily forget the uncertainty that existed before the event happened (Hammond, Keeney & Raiffa 2008).

For example, a company continues to produce traditional products when competitors are using technology to produce new innovative products. The general performance of the company described declined because customers were switching to products from the startups. As the situation gets worse, the board of directors commission a committee to investigate the problem and suggest ways to deal with it. When interviewed, no manager wanted to take the blame for the drop in sales. They all report to the investigating group that they all along knew that the company was producing poor choice products for the market. By doing this, they exhibited hindsight bias.

Sunk-Cost Bias

Sunk cost in economics and business refers to a type of cost that has been incurred and cannot be recovered. Unlike future costs which can be avoided, sunk costs are already incurred and cannot be avoided. Sunk-Cost Bias occurs when a person continues to invest in a resource such as money, time and effort even though the investment does not produce the desired results. For example, a manager can invest in the production of a certain car model, but the car fails to capture the interest of customers. Its sales are low, and it is offered at low prices to increase sales, leading to losses. If the manager continues investing in the production of the car even though it leads to losses, then he commits the sunk-cost bias. This bias occurs as a result of an ongoing commitment to a certain project or idea.

Framing Bias

Framing bias refers to a fallacy in which a person makes decisions based on how information is presented rather than the inherent facts of the issue. For example, a business manager wants to buy a book and identifies two sellers. One seller tells him that his book is 95% accurate, and another seller says that their book has 2% errors. The buyer decides to buy the book that has 95% accurate information. He does not consider that the other seller’s book has 98% accuracy. The buyer chooses a book with more errors because the seller presented their information in a positive way. This is called confirmation bias in business decision making.

 

References

Bolland, E., & Fletcher, F. (Eds.). (2012). Chapter 2: Optimizing decision making and avoiding pitfalls. Solutions: Business Problem Solving. Abingdon, GBR: Ashgate Publishing Ltd., pp. 19-25.

Hammond, J. S., Keeney, R. L., & Raiffa, H. (1998). The hidden traps in decision making. Harvard Business Review, 76(5), 47-58.

Kourdi, J. (2003). Chapter 3: Pitfalls. Business Strategy: A Guide to Effective Decision Making. Princeton, NJ, USA: Bloomberg Press.

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