Week 5: Hammond, Keeney & Raiffa (1998) The hidden traps in decision-making Flashcards
The article of Hammond et al. is a collective effort to understand what?
where bad decisions come from and how managers can guard themselves against mental traps that undermine important business decisions
Hammond et al. assume our decision-making skills are flawed by what?
Heuristics and bounded rationality
Define heuristics.
a decision-making process or route in which mental shortcuts allow an individual to make a decision, pass judgement or solve a problem quickly and with minimal effort despite limited information or biases
According to Hammond et al., bad decisions can happen in two different processes. Which ones?
- in the decision-making process (alternatives were wrongly or not at all defined)
- in the mind of the decision-maker (human brain is limited by heuristics)
According to Hammond et al, the best ways managers can guard themselves against hidden traps is to
be aware of the traps and make more informed choices.
Name all the 6 (+3) relevant traps the authors discuss.
Anchoring trap Status-quo trap Sunk-cost trap Confirming evidence trap Framing trap Estimating and Forecasting traps (Overconfidence trap, Prudence trap, Recallability trap)
When falling into the anchoring trap the mind does what?
when considering a decision, the mind gives disproportionate weight to the first information it receives (first impressions last)
anchors establish the terms on which a decision will be made
Name an example of how business managers fall into the anchoring trap.
When a business manager is looking at historical numbers (e.g. last years sales) it can influence the forecast he is about to do for next year - the numbers of last year tend to weigh too heavily into the decision-making process while other factors may not be taken into consideration at all
How can you minimise the risk of stepping into the anchoring trap in three ways?
always view a problem from a different perspective and seek confirmation only after you had time to think about it yourself to avoid others being anchored by their ideas
be open-minded
avoid anchoring your advisors, consultants, and other whom you solicit for information and counsel
In the status-quo trap, what influences our decision-making?
Why do people oftentimes fall into this trap?
decision-makers display a strong bias to decisions that maintain the status quo
to protect our ego as it is the safest, most comfortable choice and it puts you at the least psychological risk
Why is the status-quo trap relevant in the business decision-/strategy-making process?
in business people are more often punished for doing something (a sin of commission) rather than for doing nothing (a sin of omission), so they oftentimes choose the easiest way to avoid risk
Name three ways to minimise the risk of falling into the status-quo trap.
remind yourself of your objectives and whether or not the status quo leads that way
identify more options
remind yourself that the desirability of the status quo will change over time
What influences our decision-making when we fall into the sunk-cost trap?
we make a choice that justifies past choices, even when past choices are no longer valid
in other words, rationally we know were should not let the past influence our decision, but frequently people are unwilling to admit to a mistake made in the past (unconsciously)
What are sunken costs?
old investments of time or money that are now irrecoverable
Name three ways to minimise the risk of the sunk-cost trap.
make a conscious effort to set sunk costs aside
look out for sunk costs in decisions or recommendations of subordinates
don’t create a failure-fearing culture that leads employees to carry their mistakes around in their thoughts
How is our decision-making flawed when we fall into the confirming-evidence trap?
we seek out information that supports our existing instincts or point of view while avoiding information that contradicts it
The confirming-evidence trap affects where we go to _____ and how we interpret it.
collect evidence
What are the two fundamental forces at work in the confirming-evidence trap?
- our tendency to subconsciously decide what we want to do before we figure out why we want to do it
- our inclination to be more engaged by things we like rather than by things we dislike
we are drawn to information that supports our subconscious
Name three ways to minimise the risk of falling into the confirming-evidence trap.
be honest with yourself about your motives
build counterarguments to your options
always check to see if you treat all options with equal fairness
How does the framing trap influence our decision-making?
How we use language to ‘frame’ a question can make us perceive decisions as either gains or losses when they are actually neither one.
Framing is the ____ in decision-making, but is also the most ____.
first step, dangerous step
Two types of frames distort decision-making with particular frequency. What are they?
- frames as gains vs losses - people are more risk averse when a problem is posed in terms of gains but more risk-seeking when a problem is posed in terms of losses
- framing with different reference points - the reference point (view) can give a new perspective or outcome to the problem
Name three ways to minimise the framing trap.
reframe your problem over and over again
try posing problems in a neutral and redundant way that combines gains and losses or embraces different reference points
when others recommend decisions, examine the way they framed the problem
There is another set of traps that can have a particularly distorting effect on decision-making of uncertain events. How is it called?
estimating and forecasting traps
–> overconfidence trap, prudence trap, recallability trap
Why is it easy to estimate time, distance, weight and volume but hard to estimate uncertain events?
because on the first we receive instant feedback while with the second we only receive feedback about accuracy very rarely
Estimating and forecasting traps influence our ability to….
assess probabilities
The overconfidence trap describes what effect?
when we tend to be overly confident about the accuracy of our estimates and forecasts which leads to an error in judgement (which again turns into bad decisions)
The prudence trap describes what effect?
when you are being overly cautious. when faced with high-stake decisions, we tend to adjust our forecast “just to be on the safe side”
The recallability trap describes what effect?
we frequently base our predictions about future events on our memory of past events (we can be overly influenced by traumatic events).
anything that distorts your ability to recall events in a balanced way will distort your probability assessments.
Reducing forecasting and estimating traps:
To reduce the effects of the overconfidence trap in making estimates, always…
Always state your estimates honestly and explain to anyone who will be using them that…
Examine all assumptions to ensure that you are not influenced by…
start by considering the extremes
they have not been adjusted
your memory
What do the authors conclude?
- in every state of decision-making…
- the higher the stakes, the higher the…
- the risks explained can either work…
- tricks of the mind can influence the choice
- risk of being caught in a psychological trap
- in isolation or amplify one another
Jane is evaluating her subordinates in a yearly performance appraisal and has to rate them on aspects related to teamwork. She has recently witnessed John and Anne arguing with each other. She gave a low rating on the teamwork aspect of the job to both. Which cognitive trap could Jane possibly fall in?
a. The Framing Trap
b. The Overconfidence Trap
c. The Prudence Trap
d. The Recallability Trap
d.
