Week 5: Hammond, Keeney & Raiffa (1998) The hidden traps in decision-making

Question 1

The article of Hammond et al. is a collective effort to understand what?

Answer 1

where bad decisions come from and how managers can guard themselves against mental traps that undermine important business decisions

Question 2

Hammond et al. assume our decision-making skills are flawed by what?

Answer 2

Heuristics and bounded rationality

Question 3

Define heuristics.

Answer 3

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

Question 4

According to Hammond et al., bad decisions can happen in two different processes. Which ones?

Answer 4

1. in the decision-making process (alternatives were wrongly or not at all defined)
2. in the mind of the decision-maker (human brain is limited by heuristics)

Question 5

According to Hammond et al, the best ways managers can guard themselves against hidden traps is to

Answer 5

be aware of the traps and make more informed choices.

Question 6

Name all the 6 (+3) relevant traps the authors discuss.

Answer 6

Anchoring trap 
Status-quo trap 
Sunk-cost trap 
Confirming evidence trap 
Framing trap 
Estimating and Forecasting traps (Overconfidence trap, Prudence trap, Recallability trap)

Question 7

When falling into the anchoring trap the mind does what?

Answer 7

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

Question 8

Name an example of how business managers fall into the anchoring trap.

Answer 8

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

Question 9

How can you minimise the risk of stepping into the anchoring trap in three ways?

Answer 9

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

Question 10

In the status-quo trap, what influences our decision-making?

Why do people oftentimes fall into this trap?

Answer 10

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

Question 11

Why is the status-quo trap relevant in the business decision-/strategy-making process?

Answer 11

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

Question 12

Name three ways to minimise the risk of falling into the status-quo trap.

Answer 12

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

Question 13

What influences our decision-making when we fall into the sunk-cost trap?

Answer 13

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)

Question 14

What are sunken costs?

Answer 14

old investments of time or money that are now irrecoverable

Question 15

Name three ways to minimise the risk of the sunk-cost trap.

Answer 15

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

Question 16

How is our decision-making flawed when we fall into the confirming-evidence trap?

Answer 16

we seek out information that supports our existing instincts or point of view while avoiding information that contradicts it

Question 17

The confirming-evidence trap affects where we go to _____ and how we interpret it.

Answer 17

collect evidence

Question 18

What are the two fundamental forces at work in the confirming-evidence trap?

Answer 18

1. our tendency to subconsciously decide what we want to do before we figure out why we want to do it
2. 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

Question 19

Name three ways to minimise the risk of falling into the confirming-evidence trap.

Answer 19

be honest with yourself about your motives

build counterarguments to your options

always check to see if you treat all options with equal fairness

Question 20

How does the framing trap influence our decision-making?

Answer 20

How we use language to ‘frame’ a question can make us perceive decisions as either gains or losses when they are actually neither one.

Question 21

Framing is the ____ in decision-making, but is also the most ____.

Answer 21

first step, dangerous step

Question 22

Two types of frames distort decision-making with particular frequency. What are they?

Answer 22

1. 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
2. framing with different reference points - the reference point (view) can give a new perspective or outcome to the problem

Question 23

Name three ways to minimise the framing trap.

Answer 23

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

Question 24

There is another set of traps that can have a particularly distorting effect on decision-making of uncertain events. How is it called?

Answer 24

estimating and forecasting traps

–> overconfidence trap, prudence trap, recallability trap

Question 25

Why is it easy to estimate time, distance, weight and volume but hard to estimate uncertain events?

Answer 25

because on the first we receive instant feedback while with the second we only receive feedback about accuracy very rarely

Question 26

Estimating and forecasting traps influence our ability to….

Answer 26

assess probabilities

Question 27

The overconfidence trap describes what effect?

Answer 27

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)

Question 28

The prudence trap describes what effect?

Answer 28

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”

Question 29

The recallability trap describes what effect?

Answer 29

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.

Question 30

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…

Answer 30

start by considering the extremes

they have not been adjusted

your memory

Question 31

What do the authors conclude?

1. in every state of decision-making…
2. the higher the stakes, the higher the…
3. the risks explained can either work…

Answer 31

1. tricks of the mind can influence the choice
2. risk of being caught in a psychological trap
3. in isolation or amplify one another

Question 32

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

Answer 32

d.