Common Biases and Errors

Decision making engage in bounded rationally, but an accumulating body of research tells us that decision makers also 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 ‘rules of thumb’. In many instances, these shortcuts are helpful. However, they can lead to severe distortions from rationality. The following material highlights the most common distortions.

Overconfidence Bias: It’s been said that “no problem in judgment and decision making is more prevalent and more potentially catastrophic than overconfidence”. When we’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 they’re 65 to 70 percent confident that they’re right, they were actually correct only about 50 percent of the time. And when they say they’re 100 percent sure, they tended to be 70 to 85 percent correct. Here’s another interesting example. In one random sample national poll, 90 percent of Americans said they expected to go to heaven. But in anther random sample national poll, only 86 percent thought Mother Theresa was in heaven. Talk about an overconfidence bias!

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 to overestimate their performance and ability. So as managers and employees become more knowledgeable about an issue, the less likely they are to display overconfidence. And overconfidence is most likely to surface when members are considering issues or problems that are outside their area of expertise.

Anchoring Bias: the anchoring is tendency it fixes on initial information. Once set, we then fail 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, prices, and estimates carry weight relative to information received later.

Anchors are widely used by people in professions such as advertising, management, politics, real estate, and law – where persuasion skills are important. For instance, in a mock jury trial, one set of jurors was asked by the plaintiff’s attorney to make an award in the range of $15 million to $50 million. Another set of jurors was asked for an award in the range of $50million to$150 million. Consistent with the anchoring bias, the median awards were $15 versus $50 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 employer’s offer. You may want to keep this in mind when you negotiate your salary, but remember to set the anchor only as high as you realistically can.

Confirmation Bias: The rational decision making process assumes that we objectively gather information. But we don’t. We selectively gather information. The confirmation bias represents a specific case of selective perception. We seek out information that reaffirms our past choices, ad 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. Therefore, 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.