5. Decision Making

Question 1

What is bounded rationality?

Answer 1

We are limited in the information we have and the way we see it.

There is significant room for improvement in the reasoning of even the brightest, most successful managers

Question 2

How do we usually make decisions?

Answer 2

We make decisions in ‘default mode’ most of the time, relying on automatic patterns of behaviour, even more in the face of ambiguity and complexity.

E.g. opt-in vs. opt-out organ donation.

Question 3

What is bounded awareness?

Answer 3

Most people who are very focused in a task miss relevant information from the environment unrelated to that task

Question 4

How is our decision making impacted by cognitive biases?

Answer 4

We are limited in our cognitive capacity.

Prefrontal cortex: still evolving, can only handle limited amount of info at the same time.

When we are focused on one aspect of a problem, we may miss other relevant aspects. Cognitive biases similar to visual illusions (sure we are seeing things in the right manner / being rational).

We are not so good at being rational as we are at being rationalizers: ILLUSION OF RATIONALITY

Question 5

How does ambiguity and uncertainty affect decision making?

Answer 5

Need for fast decision making, on the basis of incomplete information.

Sensing danger (even at very subtle levels) can have dramatic impact on how / what you think. If not enough resources for conscious processing, brain more “automatic” and biases can become dangerous.

UNCERTAINTY and lack of control are the STRONGEST ACTIVATORS of THREAT levels.

Question 6

What is the Sunk Cost Bias?

Answer 6

The tendency for people to ESCALATE COMMITMENT to a course of action in which they have made substantial prior investments of time, money, or other resources

e.g. Should you sink more money into that old wreck car?

Beware: Initial investments will distort judgment – ability to cut losses is challenging.

Escalation of commitment example: Challenger case at NASA.

Question 7

What is Goalodicy?

Answer 7

The more a person, group, or organization relies on a future as yet unachieved goal as a source of identity, the more likely they will persist at pursuing the goal beyond what is reasonable.

Question 8

What are warning signs of goalodicy?

Answer 8

Narrowly defined goal  
Public expectation  
Face-saving behavior  
Idealized future  
Goal-driven justification

Question 9

What is availability bias?

Answer 9

Ease of recall bias

Believability of an event is related to ease of recall: if I can‘t remember it, it must not be true

Distorted by:

• vividness of information (emotional intensity)
• number of repetitions (like ads on radio and TV)
• recent info: recent events are readily available in memory “If you don’t see it often, you often don’t see it”

Question 10

What is unavailability bias?

Answer 10

If something takes too long to come to mind, we conclude it is implausible

Question 11

Example of availability bias?

Answer 11

Performance appraisals:

Vivid instances of employee behavior will be most easily recalled from memory and will seem more common. More weight usually placed to previous 3 months of the evaluation than on previous 9.

Question 12

What is overconfidence / optimism bias? (and examples)

Answer 12

We overestimate our abilities and our chances of success with respect to others

e.g. 94% professors believe to be better at research and teaching than colleagues

45-50% marriages end in divorce, but people getting married believe it won’t be them

Question 13

What is the adaptive (good) side of optimism bias?

Answer 13

Healthy mind has positive illusions, if too realistic - mildly depressed (sadder but wiser effect)

Beneficial to physical and mental health - lowers stress and anxiety

Helps us cope with an uncertain reality

Believing that a goal is within reach motivates us to act in a way that will help us attain it

Question 14

What is the dangerous side of optimism bias?

Answer 14

Planning fallacy: underestimate the cost and duration of projects (around 20-50% initially overestimated costs, often with overestimation of revenues - end up in losses of millions)

Underestimation of risk (suggested that optimism root cause of 2008 financial crash)

Ignoring invaluable advise e.g. 3 island mile disaster

Question 15

What is the British Government Green Book?

Answer 15

Important to balance being inspired and motivated to succeed with preparing to be wrong (adjust for optimism bias).

British government Green Book has specific guidelines of how to correct for the optimism bias in economic assessment.

Question 16

What is a project pre-mortem?

Answer 16

“Imagine it‘s 12 months from now, and our project was a total fiasco. It blew up in our faces. Why did it fail? “

It is better to ask “retrospectively” (it has already failed, what went wrong?) rather than prospectively (why could it fail..?).

Question 17

What is confirmation bias?

Answer 17

Perpetuating all other biases - what we see is deeply influenced by our expectations and motivations.

We continue finding evidence for our “initial” hypotheses. Not only do we seek and find confirmatory evidence in support of already existing beliefs, but we also ignore or reinterpret disconfirming evidence.

Question 18

How to improve our biases?

Answer 18

Hold the OPPOSITE hypothesis in your mind – Try to find information that supports that opposite hypothesis.