Biases in Decision Making Discussion Please answer each question. Explain why you chose the answer that you did by drawing on the concept of heuristics and

Biases in Decision Making Discussion Please answer each question. Explain why you chose the answer that you did by drawing on the concept of heuristics and biases in decision making in Chapter 15. Please reference the relevant concepts and theories in your response.

The assignment must be 1 ½ pages, double-spaced, 12 point font, 1 inch margins. Please remember to number each response.

1. Fortune magazine ranked the following 10 corporations as being among the 500 largest United States–based firms according to sales volume for 2013:

a. Group A: McDonald’s, Visa, Amazon, Target, Coca-Cola

b. Group B: Berkshire Hathaway, General Electric, Valero, McKesson, Hewlett-Packard

Which group would you say had the larger total sales volume, A or B? By what percentage (10 percent, 50 percent, 100 percent)?

2. The best student in your introductory MBA class this past semester writes poetry and is rather shy and small in stature. What was the student’s undergraduate major: Chinese studies or psychology?

3. Which of the following causes more deaths in the United States each year?

a. Stomach cancer

b. Motor vehicle accidents

4. Which would you choose?

a. A sure gain of $240.

b. A 25 percent chance of winning $1,000 and a 75 percent chance of winning nothing. Decision Making and
Organizational Learning
Part I
Professor Rao
Decision Making
Decision making is the process by which
members of an organization choose a specific
course of action to respond to the opportunities
and problems that confront them
Opportunities
Problems
15-2
1
The Decision-Making Process
? How are decisions made?
Classical
decisionmaking
model
Administrative
decisionmaking
model
15-3
Classical Decision-Making Model
Assumptions
? People have access to all necessary information
? People choose the best possible solution
Steps in the Classical Model
?List all alternatives
?List consequences of each alternative
?Rank sets from most preferred to least preferred
based on personal preference
?Select alternative that results in most preferred
15-4
set of consequences
2
Problems with the Classical Model
? Limited
Li it d iinformation
f
ti iis available.
il bl
? Cognitive abilities are limited.
? Information overload
? Impossible to make the best possible
decision.
Administrative Decision-Making Model
? Descriptive
? Satisficing
? Bounded rationality
y
3
Decision Making
Part II
Professor Rao
Common Biases and Errors in Decision
Making
• Heuristics: shortcuts or rules of thumb used to simplify
decision
d
i i making.
ki
• Leads to biases – systematic errors that lowers
decision making quality
• Common Heuristics:
• Availability Heuristic
• Representative
p
Heuristic
• Anchoring and adjustment Heuristic
• Other sources of errors
• Risk Aversion
• Escalation of Commitment Bias
4
Availability Heuristic
? The tendency to determine the frequency of an
eventt (and
( d it
its causes)) b
by h
how easy th
these events
t
(and causes) are to remember
? Biases based on the overestimation of frequency
of
? Events that evoke emotion
? Vivid
Vi id events
t
? Recent events
? Example:
? Risk of flying vs risk of driving
Representativeness Heuristic
? Tendency
y to p
predict the likelihood of an event
occurring from the extent to which the event is
typical of similar kinds of past events
? Biases
?Failure to consider base rate ((actual recorded
frequency with which an event occurs)
?Overestimating likelihood of rare event
5
Representativeness Heuristic
? The best student in your introductory MBA
class
l
thi
this pastt semester
t writes
it poetry
t and
d is
i
rather shy and small in stature.
? What was the student’s undergraduate major:
? Chinese studies? Or
? Psychology?
Representativeness Heuristic
? The answer is b.
? Most students would offer “Chinese studies,”
overlooking that psychology majors
outnumber Chinese studies majors 50:1.
? This example illustrates representative
heuristic.
6
Anchoring and Adjustment Heuristic
? Tendency to make decisions based on adjustments from
some initial amount
? Biases
? Biased decisions when initial amounts (or anchor) are too
high or too low
? Salary adjustments are often made from an “anchor” or
initial pay. If the anchor is not reasonable, this heuristic will
lead to biased decision making.
Risk Aversion
? Tendency to prefer a sure gain of a moderate
amountt over a riskier
i ki outcome,
t
even if the
th
riskier outcome might have a higher expected
payoff.
? Example: Which would you choose?
A) 50-50 flip of a coin for $200
$
B) A sure promise of $50
7
Risk Aversion
? The answer is B.
? There is a tendency to prefer the sure thing
over the riskier outcome of the coin flip, even
though mathematically the coin flip is worth
twice as much.
? This is an example of risk aversion.
Escalation of Commitment
? Tendency of decision makers to invest
additional time
time, money
money, or effort into poor
decisions.
? Why?
? Reconfirm correctness of original decision
? Desire to recoup losses
? Sunk costs
? Risky behaviors increased by negative
situation
8
Escalation of Commitment
Why Does Escalation of Commitment
Occur?
? Decision makers do not want to admit that they
have made a mistake
? Decision makers erroneously believe that an
additional commitment of resources is justified to
recoup losses
? Decision makers tend to take more risks when
they frame or view decisions in negative terms (as
a way to recover something that has been lost)
rather than in positive terms (as a way to generate
something)
9
Decision Making
Part III
Professor Rao
Group Decision Making
Advantages
g
? Availability/diversity of members’ skills,
knowledge, expertise
? Enhanced memory
? Greater ability to correct errors
? Greater decision acceptance
10
Group Decision Making
Disadvantages
g
? Time to make a decision
? Group conflict
? Diffusion of responsibility
? Potential for groupthink
Groupthink
? A pattern of faulty decision making that occurs
in cohesive groups whose members strive for
agreement at the expense of accurately
assessing information relevant to the decision.
? The group becomes closed-minded, and fails
to pay attention to important information.
? Result is poor decision making.
11
Steps for Minimizing Groupthink
? Group leader encourages thoughtfulness/criticism
? Group leader refrains from expressing own
opinions and views until group has considered all
alternatives
? Group leader encourages group members to
gather information from outside people
? Group leader assigns devil’s advocate
? Group leader holds second meeting for important
decisions
12

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