Mastering Strategic Management Chapter 10.3 to End Decision Making and Bias. Sound Familiar? Rational Choice Model. SOLVE S - State the problem in precise language O - Outline your usual response L - List your alternatives and their consequences
Mastering Strategic ManagementChapter 10.3 to EndDecision Making and Bias
Only problem with this model is that most people indicate that it is rarely the way they make decisions…
Several concern when applying model within org complex
Rational: Clear, compatible, agreed upon
Reality: Ambiguous, conflicting, lack agreement
Rational: People can process all information
Reality: People process only limited information
Rational: Choices evaluated simultaneously
Reality: Choices evaluated sequentially
Rational: Evaluate against absolute standards
Reality: Evaluate against implicit favourite
Rational: People rely on factual information
Reality: Quality of information limited
Reality: Satisfying-“good enough”
In reality, decision making is not rational because there are limits on our ability to collect and process information.
Because of these limitations, Nobel Prize-winner Herbert Simon argued that we can learn more by examining scenarios where individuals deviate from the ideal.
These decision biases provide clues to why individuals such as CEOs make decisions that in retrospect often seem very illogical— especially when they lead to actions that damage the firm and its performance.
Knowledge-based Decision Making
Way of Thinking
A ball and a bat together cost $1.10. The bat cost a dollar more than the ball. How much does the ball cost?
Over 50% of Harvard and M.I.T. students got this wrong. Why? They did not bother to check. They relied on their intuition that happened to deceive them.
1 - Anchoring and Adjustment Bias
When individuals react to arbitrary or irrelevant numbers when setting financial or other numerical targets.
Might be tempting to compare your post-grad starting salary with wages earned pre-grad, or compare to siblings, friends, parents, & others with different majors
Instead, research average starting salary for graduates with your background, experience, & other relevant characteristics
This bias can undermine firm performance when executives make decisions about potential ROI by comparing to previous deals rather than based on a realistic & careful study of potential choices
While anchoring has some effect, people often try to adjust for anchors they know are wrong by adjusting
But, they will only adjust until the point where they no longer sense that they have to adjust
Which suggests that they will adjust until reaching the edge of the unknown quantity or area of unknown
Zone of Probable Solution…
Overcome, by going a little further than you think is necessary!
2 - Availability Bias
The availability bias occurs when more readily available information is incorrectly assessed to also be more likely
Bet if I asked both of you, it adds to more than 100%. Why? Easier to Remember what I did!
Assessing risk, Which is higher danger?
2xStroke vs accidental death
20xTornadoes vs asthma
52xDeath by lightning vs botulism
18xAccidental death vs Death by disease
4xDeath by accident vrs dying from diabetes
3 - Escalation of Commitment Bias
The idea of “throwing good money after bad” illustrates the bias of escalation of commitment – when individuals continue on a failing course of action even after it becomes clear that this may be a poor path to follow. Sunk costs are Sunk!!
Regularly seen at Casinos when individuals, on a losing streak, think the next spin is increasingly likely to win
Do you do it?
4 - Fundamental Attribution Error
In a similar vein, some CEOs quick to take credit when firm performs well, but often attribute poor performance to external factors such as the state of the economy
5 - Hindsight Bias
The decline of photography firms such as Kodak resulting from increasing popularity of digital cameras may seem obvious in retrospect
But, it is easy to overlook poor quality of early digital technology & dismiss any notion that Kodak had good reasons not to view this new technology as a significant threat to film, when digital cameras were first introduced
Mark is a thin man from Germany with glasses who likes to listen to Mozart. Which is more likely?
A) Mark is a truck driver?
B) He is a professor of literature in Frankfurt?
Advice – always try to examine the most common or typical result in considering a course of action.
Should I invest in this new company (data – only 20% of new companies survive for 5 years…)
Should I run away and join the circus? (Data 83% of circus performers rate themselves ‘very happy’)
6 - Correlation and Causality
SO, WHAT’S CAUSING WHAT?
SO, WHAT’S CAUSING WHAT?
But, which direction?
Is increasing pop. density leading to more crime? or does the increasing crime rate attracting more people?
Let’s try again! I have a standard 6-sided dice, with 4 green sides and 2 red sides. Rolling it 20 times, what sequence is most probable within 20 rolls?
1 - RGRRR
2 - GRGRG
3 - GRRRR
7 - Sampling BiasIf women have 1.53 children and men have 1.38 children, does this mean that women have more children than men?
No matter what you “feel”… what are the real odds?
Might help to think of an archer, sometimes high, sometimes low… but on average somewhere near the middle…
8 – OverconfidenceHot Streaks…
9 – Representativeness & Framing Bias
10 - Satisficing
BONUS! – Loss Aversion
PS do you know that Men get breast cancer too? Buys, check the data…
Which statement will be more effective?
This final chapter has examined