When individuals make decisions, they must make choices, but doing so requires careful thought and a lot of information. Complete information, however, would overload us. Consequently we often engage in behavior that speed up the process. That is, in order to avoid information overload, we rely on judgmental shortcuts heuristics. Heuristics commonly exist in two forms – availability and representative. Both types create biases in a decision maker. Another bias is the decision maker’s tendency to escalate commitment to a failing course of action.
Availability Heuristics is the tendency to base judgments on information that is reality available. Events that invoke strong emotions are vivid to the imagination or have recently occurred create strong impression on us. As a result, we are likely to overestimate the frequency of the occurrence if unlikely events. For instance, many people have a fear of flying. Although traveling in commercial aircraft is statistically safer than driving a vehicle, aircraft accidents get much more attention. The media coverage of an air disaster causes individuals the risk of flying and under state the risk of driving. For managers, availability heuristics can also explain why, when conducting performance appraisals they tend to give more weight to more recent behaviors of an employee than the behaviors of six or nine months ago.
Heuristics: Judgmental shortcuts
Availability Heuristics: The tendency for people to base their judgments on information that is ready available to them.
Representative Heuristic: The tendency for people to base judgments of probability on things with which they are familiar.
Representative Heuristics: Literally millions of school boys dream of playing for the Indian cricket team one day. In reality most of these youngsters have a better chance of becoming medical doctors than they do of ever playing in the Indian cricket team. These dreams are examples of what we call the representative heuristic. Representative heuristic cause individuals to match the likelihood of an occurrence with something that they are familiar with. For example, young cricket players may think of someone from their neighborhood who 15 year ago went onto play for the Indian team. Or they think, while watching players on television that they could perform as well.
In organization we can find several instances of representative heuristics. Decision makers may predict the future success of anew product by relating it to a previous product’s success. Managers may also be affected by representative heuristics when they no longer hire graduates from a particular college program because the last three persons hired from that program were poor performers.
Escalation of commitment: An increased commitment to a previous decision despite negative information.
A popular strategy in playing blackjack is an effort to guarantee you can’t lose. When you lose a hand, you double your next bet. This strategy or decision rule may appear innocent enough, but if you start with a $5 bet and lose six hands in a row (not uncommon for many of us) you will be wagering $320 on your seventh hand merely to recoup your losses and win $5.
The blackjack strategy illustrates a phenomenon called escalation of commitment, an increased commitment to a previous decision despite negative information. That is, the escalation of commitment represents the tendency to stay the course, despite negative data that suggest one should do otherwise.
Some of the most notorious events involving escalation of commitment were decisions made by presidents of the US. For example: Lyndon Johnson’s increased the tonnage of bombs dropped on North Vietnam, despite constant information that bombing was not bringing the war any closer to conclusion. Richard Nixon refused to destroy his secret White House tapes. George H W Bush believed that given his popularity after Operation Desert Storm and the fall of the Soviet Union, he had only to pay attention to foreign affairs to win the 1992 presidential election. History now tells us that staying the course proved detrimental to Johnson, Nixon and Bush. In an organizational setting, similar events have occurred. For instance in the 1990s, YTI Cycles, with its traditional occurs on premium bicycles continued to focus on the premium category of cycles in the hope of a rapid growth in the segment. However, the premium segment remained small, and Hero Cycles continued to strengthen their competitive position in the mass segment by focusing on operational efficiency and volumes.