COMMON BIASES AND ERRORS IN DECISION-MAKING PROCESS
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 â€œrules 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: Itâ€™s been said that â€œno problem in judgment and decision making is more prevalent and more potentially catastrophic than overconfidence.â€?
When weâ€™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 theyâ€™re 65 to 70% confident that theyâ€™re right, they were actually correct only about 50% of the time. And when they say theyâ€™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 lawyersâ€”where persuasion skills are important For instance, in a mock jury trial, one set of jurors was asked by the plaintiffâ€™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 employerâ€™s offer. Most of us understand this and upwardly â€œadjustâ€? 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 donâ€™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 bias influences where we go to collect evidence because we tend to seek out places that are more likely to tell us what we want to hear. It also leads us to give too much weight to supporting information and too little to contradictory information.
Availability Bias: Many more people suffer from fear of flying than fear of driving in a car. The reason is that many people think flying is more dangerous. If flying on a commercial airline was as dangerous as driving, the equivalent of two 747s filled to capacity would have to crash every week, killing all aboard, to match the risk of being killed in a car accident. But the media give a lot more attention to air accidents, so we tend to overstate the risk of flying and understate the risk of driving.
This illustrates an example of the availability bias, which is the tendency for people to base their judgments on information that is readily available to them. Events that evoke emotions, that are particularly vivid, or that have occurred more recently tend to be more available in our memory. As a result, we tend to be prone to overestimating unlikely events like an airplane crash. The availability bias can also explain why managers, when doing annual performance appraisals, tend to give more weight to recent behaviors of an employee than those behaviors of six or nine months ago.
Escalation of Commitment Error: Another distortion that creeps into decisions in practice is a tendency to escalate commitment when a decision stream represents a series of decisions. Escalation of commitment refers to staying with a decision even when there is clear evidence that itâ€™s wrong. An example of this is of my friend, who has been dating a woman for about four years. He admitted that things werenâ€™t going too well in their relationship; he informed me that he was going to marry the woman. A bit surprised by his decision, I asked him why. He responded: â€œI have a lot invested in the relationship!â€?
It has been well documented that individuals escalate commitment to a failing course of action when they view themselves as a responsible for the failure. That is they â€œthrow good money after badâ€? to demonstrate that their initial decision wasnâ€™t wrong and to avoid having to admit they made a mistake. Escalation of commitment is also congruent with evidence that people try to appear consistent in what they say and do. Increasing commitment to previous actions conveys consistency.
Escalation of commitment has obvious implications for managerial decisions. Many an organization has suffered large losses because a manager was determined to prove his or her original decision was right by continuing to commit resources to what was a lost cause from the beginning. In addition, consistency is a characteristic often associated with effective leaders. So managers, in an effort to appear effective, may be motivated to be consistent when switching to another course of action. In reality, effective managers are those who are able to differentiate between situations in which persistence will pay off and situations in which it will not.