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Heuristics and Biases in Decision Making Owen Darbishire 10 th July 2008. Objectives. To understand how people make decisions To recognise common heuristics and biases in decision making To reflect upon the consequences of those for organisations
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1. Rationality limited by processing and informational requirements - sets of decisions involve such complexity that rationality affected
2. Rationality systematically impaired by cognitive factors which cause patterned deviations from optimumBounded Rationality [Simon 1957]
Small Print: If anyone breaks Rule 2, they will be fined £10.
“If at first you don’t succeed, try, try again. Then quit.
No use being a damn fool about it.” W.C. Fields
Errors in gathering &processing informationImpression management
Commitment to initial decision
Estimate = Actual Value
(a) expected value of object for sale on prior information available
(b) the expected value conditioned on winning the auction
(i) overconfidence in own estimate
(ii) ignoring cognition of others
(iii) irrational escalation to win auction
Estimated Price - £1.5-£2.0 billion
Actual Price – £22.47 billion
(Cost of licence excludes cost of roll out)
“Winners” – TIW, Vodafone, One2One, Orange, BT Cellnet
“Losers” – WorldCom, Telefonica, NTL (backed by France Telecom)
“If properly designed - and my team deserves credit for not screwing up the design - auctions are simply a way of finding the market price… . If chairmen paid too much for their licences, they have nobody to blame but themselves ” – Ken Binmore
“A ruthless, poker-playing economist” – Newsweek
NASA engineers asked to examine whether problems with o-rings on space shuttle were related to take-off temperatureChallenger Space Shuttle
NASA engineers asked to examine whether problems with o-rings on space shuttle were related to take-off temperature
Graph of temperature and o-ring performance for flights where problems occurred
(drawn before Challenger)
Confidence Estimation Exercise
- 90% accuracy
How long, in days, is the gestation (pregnancy) period of an Asian elephant
How deep, in either feet or meters, is the deepest known point in the ocean ?
The figure below provides the dollar share price chart for a particular security over a forty-eight month period. What is your prediction for the dollar share price six months beyond this forty-eight month period?
Question 4The figure below provides the dollar share price chart for a particular security over a forty-eight month period. What is your prediction for the dollar share price six months beyond this forty-eight month period?
Question 5The figure below describes the dollar change in share price for a particular security over a forty-eight month period. What is your prediction for the average change in the share price, per month, for the six months beyond this forty-eight month period?
Source: Plous 1993
Decision makers assess the frequency of a class or the probability of an event by the ease with which instances or occurrences can be brought to mind
HR director presents 2 plans:
Save 1 in 3 plants and 2000 jobs
1/3 probability of saving 3 plants & 6000 jobs
2/3 probability of saving nothing
Operations director presents 2 plans:
Will lead to the loss of 2 of the 3 plants and 4000 jobs
2/3 probability of losing all plants and 6000 jobs
1/3 probability of losing nothing
The manner in which issues or questions are phrased has a significant impact on answers and preferences.
Gains versus Losses
The tendency to over-emphasis dispositional or personality explanations, and to place too little emphasis on the situation, environment or chance
…the deterioration of mental efficiency, reality testing, and moral judgement that results from in-group processes (Janis 1982)
Choose a number between 1 and 100
The winner is the guess closest to two-thirds of the average entry.