70-386 Behavioral Decision Making

1. 70-386 Behavioral Decision Making Lecture 6: Even More Biases

2. Administrative • Quiz 1 average: 83% • Quiz 2 on Sunday • Paper presentations today and Tuesday. • No class a week from today (next Thursday) • Exam 1: 14/9 (i.e., one week from this coming Sunday)

3. Paper presentation

4. Anchoring & Adjustment • Biased information search / estimation. • Estimate 8 * 7 * 6 * 5 * 4 * 3 * 2 * 1? • Median estimate of 2250 (KT 1974) • What is 1 * 2 * 3 * 4 * 5 * 6 * 7 * 8? • Median estimate of 512 (KT 1974)

5. Anchoring and Adjustment Actual real estate agents were shown a house and given a 10-page packet of information in which only one number was varied for the experiment: the listing price. Although all the agents found the listing price to be too high, they anchored on this (arbitrary) value. The arbitrary listing price shifted their appraisals by more than $10,000! Additionally, only 1 in 10 agents mentioned the listing price as a factor in their judgment

6. Conjunctive and Disjunctive Events Which of the following instances seems most likely? _______ Second most likely?________ • Drawing a red marble from a bag containing 50% red marbles and 50% white marbles. • Drawing a red marble seven times in succession, with replacement, from a bag containing 90% red marbles and 10% red marbles. • Drawing at least one red marble in seven tries, with replacement, from a bag containing 10% red marbles and 90% white marbles. • 6 of you said B-A-C • 3 said A-C-B • 1 said A-B-C  Most people say B-A-C Actual answer is C-A-B.

7. Conjunctive and Disjunctive Events • People overestimate conjunctive events (“and”) • All subcomponents must occur for the event to occur • And underestimate disjunctive events (“or”). • Any of the subcomponents can occur for the event to occur. People aren’t intuitive statisticians. • So what? That’s why we take classes… • Business applications? • Connections to the planning fallacy?

8. Hindsight and Curse of Knowledge • Hindsight: • People think they knew things when they didn’t • Who does this? • Nearly every stock-picker and pundit. Everywhere. (really: everyone) • Curse of Knowledge • Once we know something, it’s really hard to image that we didn’t. • A main driver of communications failures

9. Fundamental Attribution Error (FAE) • Tendency to over-attribute behaviors to personality-based factors • Under-emphasize the role and power of situational influences on the same behavior • Personality/Dispositional Factors • Abilities, traits, motives • Situational Factors • Time of day, environmental conditions

10. Actor-Observer Bias Other side of the FAE • Actors attribute their own actions to situational requirements • Observers attribute the same actions to personality traits (FAE) • E.g., if I do poorly on an exam, it’s because of something situational (I didn’t sleep well last night); If you do poorly on the same exam, it’s dispositional (you were lazy and didn’t study enough) • Debiasing: • Reverse the actor-observer positions. How would you behave in a similar circumstance? • Consider what’s not present. Have you omitted or under-emphasized important factors?

11. Framing • A “decision frame” is the decision-maker’s conception of the acts, outcomes, and contingencies associated with a particular choice • Gain vs Loss • Allow vs Forbid

12. Framing: Examples How you ask can determine the answer

13. Framing: Survey Results Imagine that you have just finished a project and have been given a $2,000 bonus. Your boss now offers you the following two options Option 1: You will get an additional $1,000. Option 2: If the company gets its bid accepted on a new project (50% chance), you will get an additional $2,000; if it does not get the job, you will get no additional money. (The company will hear today about the bid.) Which option would you prefer? Imagine that you have just finished a project and have been given a $4,000 bonus. Your boss now offers you the following two options Option 1: You must give back $1,000. Option 2: If the company gets its bid accepted on a new project (50% chance), you can keep the $4,000; if it does not get the job, you must give back $2,000. (The company will hear today about the bid.) Which option would you prefer?

14. Framing: Survey Results A hurricane is threatening 12 identical oil platforms that your company is building in the Gulf of Mexico. It doesn't look good for them. A structural engineer proposes two possible courses of action: Plan A and Plan B. If you decide on Plan A, 4 platforms will be saved. If you decide on Plan B, there is a 1/3 probability that all 12 will be saved, and a 2/3 probability that none will be saved. Which plan do you favor? Plan A or Plan B A hurricane is threatening 12 identical oil platforms that your company is building in the Gulf of Mexico. It doesn't look good for them. A structural engineer proposes two possible courses of action: Plan A and Plan B. If you decide on Plan A, 8 platforms will be lost. If you decide on Plan B, there is a 1/3 probability that none will be lost, and a 2/3 probability that all 12 will be lost. Which plan do you favor? Plan A or Plan B No mathematical difference. Just “saved” vs “lost”

15. Sunk Costs • Sunk costs shouldn’t influence decisions • Can’t go backward • Money/Time already spent • Would you be more likely to go to a concert if you already paid for the ticket? • The “sunk cost” issue is more complicated than that… • Credible commitment (repeated interactions) • Non-monetary objectives • Value of “reversible commitments” (what would you be willing to pay to be able to change your mind?) • “