SlideShare a Scribd company logo
AUTHOR: ANKIT SAXENA
The Hidden Traps in Decision Making
In making decisions, you may be at the mercy of your mind’s strange workings.
Here’s how to catch thinking traps before they become judgement disaster.
By John S. Hammond, Ralph L. Keeney, and Howard Raffia
Introduction
Before deciding on a course of action, prudent managers evaluate the situation confronting them.
Unfortunately, some managers are cautious to a fault – taking costly steps to defend against unlikely outcomes.
Others are overconfident – underestimating the range of potential outcomes. And still others are highly
impressionable – allowing memorable events in the past to dictate their view of what might be possible now.
3
Introduction
These are just three of the well-documented psychological traps that afflict most managers at some point,
assert authors John S. Hammond, Ralph L. Keeney, and Howard Raiffa in their 1998 article. Still, more pitfalls
distort reasoning ability or cater to our own biases. Examples of the latter include the tendencies to stick with
the status quo, to look for evidence confirming one’s preferences, and to throw good money after bad because
it’s hard to admit making a mistake.
4
Introduction
Luckily, techniques exist to overcome each one of these problems. For instance, since the way a problem is
posed can influence how you think about it, try to reframe the question in various ways and ask yourself how
your thinking might change for each version. Even if we can’t eradicate the distortions ingrained in the way our
minds work, we can build tests like this into our decision-making processes to improve the quality of the choices
we make.
5
Decision Traps
ANCHORING STATUS-QUO SUNK-COST CONFIRMATION FRAMING
ESTIMATION
Page 7 Page 8 Page 9 Page 10
Page 12
Page 11
6
GROUP THINK
VAGUE
VERBIAGE
OVERCONFIDENCE BASE-RATE
Page 13 Page 14 Page 16 Page 17
The Anchoring Trap
When considering a decision, the mind gives disproportionate weight to the first information it receives. Initial
impressions, estimates, or data anchor subsequent thoughts and judgements.
HOW THIS TRAP CAN AFFECT YOU OVERCOMING THIS TRAP
Anchors take many guises. They can be as simple and
seemingly innocuous as a comment offered by a colleague or
a statistic appearing in the morning newspaper. They can be
as insidious as a stereotype about a person’s skin color,
accent, or dress. In business, one of the most common types
of anchors is a past event or trend.
Use alternative
starting points
Think about the
problem on your own
Seek information from
other sources
Be careful of setting
anchors yourself
11 99
$30 $80
How much will you bid
for this wine?
Think of a random
number
7
The Status-Quo Trap
We naturally look for reasons to do nothing to protect our ego from damage. Breaking the status quo means
taking action, which means taking responsibility, thus, opening ourselves to criticism and regret.
People sometimes, for example, inherit shares of stock that
they would never have bought themselves. Although it would
be a straightforward, inexpensive proposition to sell those
shares and put the money into a different investment, a
surprising number of people don’t sell. They find the status
quo comfortable, and they avoid taking action that would
upset it. “Maybe I’ll rethink it later,” they say. But “later” is
usually never.
Never think of your
status quo as your
only option
Would you choose the
status quo, if it wasn’t the
status quo?
Appeal of the status quo
will change with time, so
keep evaluating
Avoid exaggerating
the effort to make a
change
OUTCOME
VALUE
GainsLosses
1 unit
1 unit
1 unit
1.31 units
People give a higher weight to
what they already have
making them attached to
their current situation and
goods. Kahneman and
Tversky’s prospect theory
(1992) showed that people felt
losses more than they felt
equivalent gains and this loss
aversion prompts them to
stay with the status quo.
8
HOW THIS TRAP CAN AFFECT YOU OVERCOMING THIS TRAP
The Sunk-Cost Trap
We often make choices that justify past choices, even when past choices no longer seem valid.
Frequently, it’s because people are unwilling, consciously or
not, to admit to a mistake. Acknowledging a poor decision in
one’s personal life may be purely a private matter, involving
only one’s self-esteem, but in business, a bad decision is
often a very public matter, inviting critical comments from
colleagues or bosses. If you fire a poor performer whom you
hired, you’re making a public admission of poor judgment. It
seems psychologically safer to let him or her stay on, even
though that choice only compounds the error.
Seek other
perspectives
Examine why an old
mistake distresses you
Don’t cultivate a
failure-fearing culture
Be on the lookout for
sunk cost
9
HOW THIS TRAP CAN AFFECT YOU OVERCOMING THIS TRAP
The Confirmation Trap
This bias leads us to seek information that supports our existing instinct or point of view.
There are two fundamental psychological forces at work here.
The first is our tendency to subconsciously decide what we
want to do before we figure out why we want to do it. The
second is our inclination to be more engaged by things we
like than by things we dislike – a tendency well documented
even in babies. Naturally, then, we are drawn to information
that supports our subconscious leanings. Examine all the
available evidence
Assign a devil’s
advocate
Avoid leading
questions when
seeking advice
Be honest with
yourself about your
motives
A Q 4 7
A) A, 4
B) A, 7
C) Q, 4
D) Q, 7
If a card has a vowel on one side,
then it must have an even number
on the other side.
Most people choose A and 4
because these are the cards
capable of confirming the
statement, but confirming
evidence doesn’t prove anything
– the 4 card has no ability to
invalidate the hypothesis.
Flipping the 7 card, however,
could provide valuable
disconfirming evidence – a vowel
on the other side means not all
cards with vowels have an even
number on the other side.
10
HOW THIS TRAP CAN AFFECT YOU OVERCOMING THIS TRAP
The Framing Trap
Framing bias occurs when people make a decision based on the way it’s presented, as opposed to just on the
facts themselves. The same facts presented in another way can lead to different judgments or decisions.
A frame can establish the status quo, introduce an anchor,
highlight a sunk cost, or lead you to confirming evidence.
Framing can be particularly important when assessing risk
tolerance; advisors and clients alike need to make sure to
develop a shared understanding of what constitutes risk and
should decide how much risk is tolerable for a given client. Don’t automatically
accept the initial
frame
Try positioning
problems in a neutral,
redundant way
Challenge people’s
questions with other
frames
Think hard
throughout your
decision making
process
OPTION 1:
In Q3, our Earnings per
Share (EPS) were $1.25,
compared to expectations
of $1.27
OPTION 2:
In Q3, our Earnings per
Share (EPS) were $1.25,
compared to Q2, where
they were $1.21
Clearly, option 2 does a better job of framing the
earnings report. The way it is presented as an
improvement over the previous quarter puts a
more positive spin on the EPS number.
11
HOW THIS TRAP CAN AFFECT YOU OVERCOMING THIS TRAP
Traps in Estimating and Forecasting
Making estimates about time, distance, weight and volume are familiar, and we can get good at those
estimations because we can get quick feedback. However, making forecasts with uncertain events is difficult.
There are three traps within forecasting:
Manage
overconfidence by
considering extremes
Examine your
assumptions and get
more statistics to
reduce recallability
Manage prudence
with honesty by telling
people if estimates
haven’t been adjusted
Think hard
throughout your
decision making
process
Overconfidence
We are often overconfident about our
ability to forecast.
Prudence Trap
We err on the side of caution when faced
with high-stakes decisions.
Recallability Trap
Our forecasts are often influenced by
our own experiences.
12
HOW THIS TRAP CAN AFFECT YOU OVERCOMING THIS TRAP
13
Group Think
Groupthink is a term developed by social psychologist Irving Janis in 1972 to describe suboptimal decisions
made by a group due to group social pressures.
HOW THIS TRAP CAN AFFECT YOU OVERCOMING THIS TRAP
It is a phenomenon in which the ways of approaching
problems or matters are dealt by the consensus of a group
rather than by individuals acting independently. Essentially,
groupthink occurs when a group makes faulty or ineffective
decisions just for the sake of reaching an agreement. The
following situations increase the likelihood of groupthink:
Vague or abstract words can create confusing meanings in
your receiver's mind. They state a general idea but leave the
precise meaning to the receiver's interpretation. The following
examples show vague or abstract words and ways to make
them specific and precise:
Vague Precise
Many 1,000 or 500 to 1,000
Early 5 a.m.
Hot 100 degrees Fahrenheit
Most 89.9 percent
Others Business administration students
Poor student has a 1.6 grade point average (4.0 = A)
Very rich A millionaire
Soon 7 p.m., Tuesday
Furniture An oak desk
Group identity
When there is strong group
identity.
Leader influence
When a charismatic leader
commands the group.
Lack of knowledge
When people lack personal
knowledge of something or
feel that other members of
the group are more
qualified.
Cognitive load
Where the group is placed
under extreme stress or
where moral dilemmas exist.
14
The Vague Verbiage Trap
HOW THIS TRAP CAN AFFECT YOU OVERCOMING THIS TRAP
Though vagueness often occurs unintentionally, it may also
be employed as a deliberate rhetorical strategy to avoid
dealing with an issue or responding directly to a question.
Macagno and Walton note that vagueness "can also be
introduced for the purpose of allowing the speaker to
redefine the concept he wishes to use" (Emotive Language in
Argumentation, 2014).
The following examples show vague or abstract words and
ways to make them specific and precise:
Vague Precise
Many 1,000 or 500 to 1,000
Early 5 a.m.
Hot 100 degrees Fahrenheit
Most 89.9 percent
Others Business administration students
Poor student has a 1.6 grade point average (4.0 = A)
Very rich A millionaire
Soon 7 p.m., Tuesday
Furniture An oak desk
Vague or abstract words can create confusing meanings in your receiver's mind. They state a general idea but
leave the precise meaning to the receiver's interpretation.
15
The Vague Verbiage Trap
A corporation’s earnings report needs to be interpreted and digested by both analysts and the market. The conference call accompanying the
reports release, predominantly conducted by the CEO and CFO, conveys valuable information that facilitates this process. Word choice by
managers affects information processing. In particular the use of uncertain words, such as “probably” and “maybe”, induces investors to
respond less to earnings surprises. That is especially true for managers answers to analyst questions.
We have established that earnings communicated by vague managers delay the responses of analysts and increase their uncertainty; they also
cloud the picture for the majority of investors. These are major consequences but they do not explain why firms might hire vague managers.
Could vague talk bring any benefits? The answer is “yes” in a second-best world where managers’ statements that prove to be excessive after the
fact get punished. Arguably, this issue would be more pronounced for positive statements, if things later take a turn for the worse. This is
especially relevant given the general tendency of analysts to issue overly optimistic forecasts (Hong and Kubik, 2003). Hence, if vague style
indeed helps tone down positive expectations, we would expect to see fewer (or less) negative earnings surprises for vague managers.
1. Do managers tilt to vagueness when they have reason to do so, for example to cushion disappointing earnings when her options are
coming due?
2. Our method for identifying style can be employed to study other speech characteristics. For instance, do managers differ in their
propensity to use positive/negative, quantitative/qualitative, or other types of statements, and what are the capital market effects, if
any, of such style differences that are identified?
EARNINGS REPORT EXAMPLE
Vague or abstract words can create confusing meanings in your receiver's mind. They state a general idea but
leave the precise meaning to the receiver's interpretation.
16
The Overconfidence Trap
The overconfidence bias is the tendency people have to be more confident in their own abilities, such as
driving, teaching, or spelling, than is objectively reasonable.
Below
Average
Average
Above
Average
Percentage of
managers
(n = 300) 76%
24%
Source: Montier (2006). Behaving badly.
Self-reported belief in their fund-management
ability relative to other fund managers
For example, overconfidence can make people less cautious
in their decisions, excessively trade their portfolios, and
under-diversify, all of which lead to underperformance.
A survey showed that most managers think they have above
average analytical skills (a statistical impossibility.)
Make data-driven and
evidence-based
decisions
Corroborate claims
with information from
multiple sources
Be more specific
about predictions
Perform multiple
assessments of the
same thing
HOW THIS TRAP CAN AFFECT YOU OVERCOMING THIS TRAP
17
The Base-Rate Neglect Trap
In finance, investors are prone to believe that a history of a
remarkable performance of a given firm is ‘representative’ of
a general performance that the firm will continue to generate
into the future. Thus, they overreact to salient and similar
information about firms past performance such as similar
consecutive earnings surprises. This usually leads to a
violation of the Bayes' theorem.
Widen your
perspective and scope
of data
Think probabilistically
and apply the Bayes’
theorem
List down potential
causes for failure of
companies
Avoid narrow
categorizations of
companies
P(A|B) =
P(B|A) . P(A)
P(B)
P(B|A) → Probability of finding a pharma company among successful IPOs
P(A) → Probability of a successful IPO
P(B) → Probability of company being a pharma firm
P(A|B) → Probability of a successful IPO by a new pharma company
Investors should use this for accurate predictions
Representativeness forces us to focus on this
Base-rates that are often neglected
HOW THIS TRAP CAN AFFECT YOU OVERCOMING THIS TRAP
Base rate fallacy, or base rate neglect, is a cognitive error whereby too little weight is placed on the base, or
original rate, of possibility (e.g., the probability of A given B.)
Even though we shared some specific ways managers can guard against these
traps, it’s important to remember, “the best defense is always awareness.”
“Executives who attempt to familiarize themselves with these traps and the diverse
forms they take will be better able to ensure that the decisions they make are
sound and that the recommendations proposed by subordinates or associates are
reliable.”
Conclusion

More Related Content

What's hot

Negotiation in B2B relationships
Negotiation in B2B relationshipsNegotiation in B2B relationships
Negotiation in B2B relationships
Asia Pacific Marketing Institute
 
a16z - Adreessen Horowitz
a16z - Adreessen Horowitza16z - Adreessen Horowitz
a16z - Adreessen Horowitz
Andre Cytryn
 
Creating Shared Value
Creating Shared ValueCreating Shared Value
Creating Shared Value
Dr. Amit Kapoor
 
Focused factory
Focused factoryFocused factory
Focused factory
ShashikanthPatil1
 
Book sharing - Getting to Yes
Book sharing - Getting to YesBook sharing - Getting to Yes
Book sharing - Getting to Yes
KMS Technology
 
Creative Problem Solving - Six Thinking Hats and Other Tools by CTR
Creative Problem Solving - Six Thinking Hats and Other Tools by CTRCreative Problem Solving - Six Thinking Hats and Other Tools by CTR
Creative Problem Solving - Six Thinking Hats and Other Tools by CTR
Andre Hannemann Harris
 
Case study kulicke and soffa industries inc - group 4
Case study   kulicke and soffa industries inc - group 4Case study   kulicke and soffa industries inc - group 4
Case study kulicke and soffa industries inc - group 4
Piyush Sogra
 
Getting To Yes - Negotiating Agreement Without Giving In
Getting To Yes - Negotiating Agreement Without Giving InGetting To Yes - Negotiating Agreement Without Giving In
Getting To Yes - Negotiating Agreement Without Giving Indre229
 
Blue Ocean Strategy
Blue Ocean Strategy  Blue Ocean Strategy
Blue Ocean Strategy
Yodhia Antariksa
 
Getting Past No
Getting Past NoGetting Past No
Getting Past No
John Cousins
 
Dominion Motor Ltd
Dominion Motor LtdDominion Motor Ltd
Dominion Motor Ltd
Argha Ray
 
Power of Negotiation (Negotiation Power)
Power of Negotiation (Negotiation Power)Power of Negotiation (Negotiation Power)
Power of Negotiation (Negotiation Power)
Ahmed Adel
 
Negotiation Ethics
Negotiation EthicsNegotiation Ethics
Negotiation Ethics
Jon R Wallace
 
Morning Star Case Study
Morning Star Case Study Morning Star Case Study
Morning Star Case Study
Ashuvyas2128
 
Recruitment of a Star
Recruitment of a StarRecruitment of a Star
Recruitment of a Star
Indiran K
 
HARRAH's Entertainment - Case Study on Real-Time CRM
HARRAH's Entertainment - Case Study on Real-Time CRMHARRAH's Entertainment - Case Study on Real-Time CRM
HARRAH's Entertainment - Case Study on Real-Time CRM
Sreejith Nair
 
Himachal Fertilizers_Group 3_Business Ethics (1).pptx
Himachal Fertilizers_Group 3_Business Ethics (1).pptxHimachal Fertilizers_Group 3_Business Ethics (1).pptx
Himachal Fertilizers_Group 3_Business Ethics (1).pptx
ShirajithASAlumni
 
Lumen and Absorb teams at Crutchfield Chemical Engineering
Lumen and Absorb teams at Crutchfield Chemical EngineeringLumen and Absorb teams at Crutchfield Chemical Engineering
Lumen and Absorb teams at Crutchfield Chemical Engineering
Kaustabh Basu
 

What's hot (20)

Negotiation in B2B relationships
Negotiation in B2B relationshipsNegotiation in B2B relationships
Negotiation in B2B relationships
 
a16z - Adreessen Horowitz
a16z - Adreessen Horowitza16z - Adreessen Horowitz
a16z - Adreessen Horowitz
 
Creating Shared Value
Creating Shared ValueCreating Shared Value
Creating Shared Value
 
Focused factory
Focused factoryFocused factory
Focused factory
 
Book sharing - Getting to Yes
Book sharing - Getting to YesBook sharing - Getting to Yes
Book sharing - Getting to Yes
 
Mind tree:A community of communities
Mind tree:A community of communitiesMind tree:A community of communities
Mind tree:A community of communities
 
Win win negotiation techniques
Win win negotiation techniquesWin win negotiation techniques
Win win negotiation techniques
 
Creative Problem Solving - Six Thinking Hats and Other Tools by CTR
Creative Problem Solving - Six Thinking Hats and Other Tools by CTRCreative Problem Solving - Six Thinking Hats and Other Tools by CTR
Creative Problem Solving - Six Thinking Hats and Other Tools by CTR
 
Case study kulicke and soffa industries inc - group 4
Case study   kulicke and soffa industries inc - group 4Case study   kulicke and soffa industries inc - group 4
Case study kulicke and soffa industries inc - group 4
 
Getting To Yes - Negotiating Agreement Without Giving In
Getting To Yes - Negotiating Agreement Without Giving InGetting To Yes - Negotiating Agreement Without Giving In
Getting To Yes - Negotiating Agreement Without Giving In
 
Blue Ocean Strategy
Blue Ocean Strategy  Blue Ocean Strategy
Blue Ocean Strategy
 
Getting Past No
Getting Past NoGetting Past No
Getting Past No
 
Dominion Motor Ltd
Dominion Motor LtdDominion Motor Ltd
Dominion Motor Ltd
 
Power of Negotiation (Negotiation Power)
Power of Negotiation (Negotiation Power)Power of Negotiation (Negotiation Power)
Power of Negotiation (Negotiation Power)
 
Negotiation Ethics
Negotiation EthicsNegotiation Ethics
Negotiation Ethics
 
Morning Star Case Study
Morning Star Case Study Morning Star Case Study
Morning Star Case Study
 
Recruitment of a Star
Recruitment of a StarRecruitment of a Star
Recruitment of a Star
 
HARRAH's Entertainment - Case Study on Real-Time CRM
HARRAH's Entertainment - Case Study on Real-Time CRMHARRAH's Entertainment - Case Study on Real-Time CRM
HARRAH's Entertainment - Case Study on Real-Time CRM
 
Himachal Fertilizers_Group 3_Business Ethics (1).pptx
Himachal Fertilizers_Group 3_Business Ethics (1).pptxHimachal Fertilizers_Group 3_Business Ethics (1).pptx
Himachal Fertilizers_Group 3_Business Ethics (1).pptx
 
Lumen and Absorb teams at Crutchfield Chemical Engineering
Lumen and Absorb teams at Crutchfield Chemical EngineeringLumen and Absorb teams at Crutchfield Chemical Engineering
Lumen and Absorb teams at Crutchfield Chemical Engineering
 

Similar to The Hidden Traps in Decision Making

A Different Perspective - Rediscovering Bias
A Different Perspective - Rediscovering BiasA Different Perspective - Rediscovering Bias
A Different Perspective - Rediscovering Bias
Alex Clapson
 
OB-6 Perception and decision making.pdf
OB-6 Perception and decision making.pdfOB-6 Perception and decision making.pdf
OB-6 Perception and decision making.pdf
SindhuDawani1
 
Persuasion architectures: Nudging People to do the Right Thing
Persuasion architectures: Nudging People to do the Right ThingPersuasion architectures: Nudging People to do the Right Thing
Persuasion architectures: Nudging People to do the Right Thing
User Vision
 
negotiating issues_Decision making for business leaders [compatibility mode]
negotiating issues_Decision making for business leaders [compatibility mode]negotiating issues_Decision making for business leaders [compatibility mode]
negotiating issues_Decision making for business leaders [compatibility mode]imec.archive
 
Critical Analytical ThinkingPart II Heuristics and Bias.docx
Critical Analytical ThinkingPart II Heuristics and Bias.docxCritical Analytical ThinkingPart II Heuristics and Bias.docx
Critical Analytical ThinkingPart II Heuristics and Bias.docx
annettsparrow
 
Behavioral Economics as a Lens for Interaction design
Behavioral Economics as a Lens for Interaction designBehavioral Economics as a Lens for Interaction design
Behavioral Economics as a Lens for Interaction design
Paul Sas
 
The act
The actThe act
Sales Training Final
Sales Training FinalSales Training Final
Sales Training Final
sherhusk
 
Brainjuicer behavingeconomicallywiththtruth
Brainjuicer behavingeconomicallywiththtruthBrainjuicer behavingeconomicallywiththtruth
Brainjuicer behavingeconomicallywiththtruth
viasatcreative
 
Behavioral economics in 22 slides - showing that we are irrational
Behavioral economics in 22 slides - showing that we are irrationalBehavioral economics in 22 slides - showing that we are irrational
Behavioral economics in 22 slides - showing that we are irrational
Kurt Nelson, PhD
 
Positivity & Feedback
Positivity & FeedbackPositivity & Feedback
Positivity & Feedback
Daniel Jeffrey Hairfield
 
Behavioural economics alumni
Behavioural economics alumniBehavioural economics alumni
Behavioural economics alumni
Square Holes
 
Introduction to unconscious bias
Introduction to unconscious biasIntroduction to unconscious bias
Introduction to unconscious bias
Karen M. Landolt
 
Yes 50 Scientifically Proven Ways To Be Persuasive
Yes 50 Scientifically Proven Ways To Be PersuasiveYes 50 Scientifically Proven Ways To Be Persuasive
Yes 50 Scientifically Proven Ways To Be Persuasive
Alan French
 
Thinking Fast & Slow presentation
Thinking Fast & Slow presentationThinking Fast & Slow presentation
Thinking Fast & Slow presentation
Laure Parsons
 
Persuasion Equation The Subtle Science of Getting Your Way.docx
Persuasion Equation The Subtle Science of Getting Your Way.docxPersuasion Equation The Subtle Science of Getting Your Way.docx
Persuasion Equation The Subtle Science of Getting Your Way.docx
karlhennesey
 
Neuroscience of Grantmaking and Giving
Neuroscience of Grantmaking and GivingNeuroscience of Grantmaking and Giving
Neuroscience of Grantmaking and Giving
Tony Macklin
 
Decision Making Essays
Decision Making EssaysDecision Making Essays
Decision Making Essays
Paper Writer Service
 

Similar to The Hidden Traps in Decision Making (20)

A Different Perspective - Rediscovering Bias
A Different Perspective - Rediscovering BiasA Different Perspective - Rediscovering Bias
A Different Perspective - Rediscovering Bias
 
Cognitive biases
Cognitive biasesCognitive biases
Cognitive biases
 
OB-6 Perception and decision making.pdf
OB-6 Perception and decision making.pdfOB-6 Perception and decision making.pdf
OB-6 Perception and decision making.pdf
 
Persuasion architectures: Nudging People to do the Right Thing
Persuasion architectures: Nudging People to do the Right ThingPersuasion architectures: Nudging People to do the Right Thing
Persuasion architectures: Nudging People to do the Right Thing
 
negotiating issues_Decision making for business leaders [compatibility mode]
negotiating issues_Decision making for business leaders [compatibility mode]negotiating issues_Decision making for business leaders [compatibility mode]
negotiating issues_Decision making for business leaders [compatibility mode]
 
Critical Analytical ThinkingPart II Heuristics and Bias.docx
Critical Analytical ThinkingPart II Heuristics and Bias.docxCritical Analytical ThinkingPart II Heuristics and Bias.docx
Critical Analytical ThinkingPart II Heuristics and Bias.docx
 
Behavioral Economics as a Lens for Interaction design
Behavioral Economics as a Lens for Interaction designBehavioral Economics as a Lens for Interaction design
Behavioral Economics as a Lens for Interaction design
 
The act
The actThe act
The act
 
Sales Training Final
Sales Training FinalSales Training Final
Sales Training Final
 
Perception and individual decision making
Perception and individual decision makingPerception and individual decision making
Perception and individual decision making
 
Brainjuicer behavingeconomicallywiththtruth
Brainjuicer behavingeconomicallywiththtruthBrainjuicer behavingeconomicallywiththtruth
Brainjuicer behavingeconomicallywiththtruth
 
Behavioral economics in 22 slides - showing that we are irrational
Behavioral economics in 22 slides - showing that we are irrationalBehavioral economics in 22 slides - showing that we are irrational
Behavioral economics in 22 slides - showing that we are irrational
 
Positivity & Feedback
Positivity & FeedbackPositivity & Feedback
Positivity & Feedback
 
Behavioural economics alumni
Behavioural economics alumniBehavioural economics alumni
Behavioural economics alumni
 
Introduction to unconscious bias
Introduction to unconscious biasIntroduction to unconscious bias
Introduction to unconscious bias
 
Yes 50 Scientifically Proven Ways To Be Persuasive
Yes 50 Scientifically Proven Ways To Be PersuasiveYes 50 Scientifically Proven Ways To Be Persuasive
Yes 50 Scientifically Proven Ways To Be Persuasive
 
Thinking Fast & Slow presentation
Thinking Fast & Slow presentationThinking Fast & Slow presentation
Thinking Fast & Slow presentation
 
Persuasion Equation The Subtle Science of Getting Your Way.docx
Persuasion Equation The Subtle Science of Getting Your Way.docxPersuasion Equation The Subtle Science of Getting Your Way.docx
Persuasion Equation The Subtle Science of Getting Your Way.docx
 
Neuroscience of Grantmaking and Giving
Neuroscience of Grantmaking and GivingNeuroscience of Grantmaking and Giving
Neuroscience of Grantmaking and Giving
 
Decision Making Essays
Decision Making EssaysDecision Making Essays
Decision Making Essays
 

Recently uploaded

What is the TDS Return Filing Due Date for FY 2024-25.pdf
What is the TDS Return Filing Due Date for FY 2024-25.pdfWhat is the TDS Return Filing Due Date for FY 2024-25.pdf
What is the TDS Return Filing Due Date for FY 2024-25.pdf
seoforlegalpillers
 
20240425_ TJ Communications Credentials_compressed.pdf
20240425_ TJ Communications Credentials_compressed.pdf20240425_ TJ Communications Credentials_compressed.pdf
20240425_ TJ Communications Credentials_compressed.pdf
tjcomstrang
 
一比一原版加拿大渥太华大学毕业证(uottawa毕业证书)如何办理
一比一原版加拿大渥太华大学毕业证(uottawa毕业证书)如何办理一比一原版加拿大渥太华大学毕业证(uottawa毕业证书)如何办理
一比一原版加拿大渥太华大学毕业证(uottawa毕业证书)如何办理
taqyed
 
Search Disrupted Google’s Leaked Documents Rock the SEO World.pdf
Search Disrupted Google’s Leaked Documents Rock the SEO World.pdfSearch Disrupted Google’s Leaked Documents Rock the SEO World.pdf
Search Disrupted Google’s Leaked Documents Rock the SEO World.pdf
Arihant Webtech Pvt. Ltd
 
Putting the SPARK into Virtual Training.pptx
Putting the SPARK into Virtual Training.pptxPutting the SPARK into Virtual Training.pptx
Putting the SPARK into Virtual Training.pptx
Cynthia Clay
 
Memorandum Of Association Constitution of Company.ppt
Memorandum Of Association Constitution of Company.pptMemorandum Of Association Constitution of Company.ppt
Memorandum Of Association Constitution of Company.ppt
seri bangash
 
Sustainability: Balancing the Environment, Equity & Economy
Sustainability: Balancing the Environment, Equity & EconomySustainability: Balancing the Environment, Equity & Economy
Sustainability: Balancing the Environment, Equity & Economy
Operational Excellence Consulting
 
Buy Verified PayPal Account | Buy Google 5 Star Reviews
Buy Verified PayPal Account | Buy Google 5 Star ReviewsBuy Verified PayPal Account | Buy Google 5 Star Reviews
Buy Verified PayPal Account | Buy Google 5 Star Reviews
usawebmarket
 
anas about venice for grade 6f about venice
anas about venice for grade 6f about veniceanas about venice for grade 6f about venice
anas about venice for grade 6f about venice
anasabutalha2013
 
Kseniya Leshchenko: Shared development support service model as the way to ma...
Kseniya Leshchenko: Shared development support service model as the way to ma...Kseniya Leshchenko: Shared development support service model as the way to ma...
Kseniya Leshchenko: Shared development support service model as the way to ma...
Lviv Startup Club
 
Improving profitability for small business
Improving profitability for small businessImproving profitability for small business
Improving profitability for small business
Ben Wann
 
RMD24 | Debunking the non-endemic revenue myth Marvin Vacquier Droop | First ...
RMD24 | Debunking the non-endemic revenue myth Marvin Vacquier Droop | First ...RMD24 | Debunking the non-endemic revenue myth Marvin Vacquier Droop | First ...
RMD24 | Debunking the non-endemic revenue myth Marvin Vacquier Droop | First ...
BBPMedia1
 
FINAL PRESENTATION.pptx12143241324134134
FINAL PRESENTATION.pptx12143241324134134FINAL PRESENTATION.pptx12143241324134134
FINAL PRESENTATION.pptx12143241324134134
LR1709MUSIC
 
ModelingMarketingStrategiesMKS.CollumbiaUniversitypdf
ModelingMarketingStrategiesMKS.CollumbiaUniversitypdfModelingMarketingStrategiesMKS.CollumbiaUniversitypdf
ModelingMarketingStrategiesMKS.CollumbiaUniversitypdf
fisherameliaisabella
 
Premium MEAN Stack Development Solutions for Modern Businesses
Premium MEAN Stack Development Solutions for Modern BusinessesPremium MEAN Stack Development Solutions for Modern Businesses
Premium MEAN Stack Development Solutions for Modern Businesses
SynapseIndia
 
ENTREPRENEURSHIP TRAINING.ppt for graduating class (1).ppt
ENTREPRENEURSHIP TRAINING.ppt for graduating class (1).pptENTREPRENEURSHIP TRAINING.ppt for graduating class (1).ppt
ENTREPRENEURSHIP TRAINING.ppt for graduating class (1).ppt
zechu97
 
Skye Residences | Extended Stay Residences Near Toronto Airport
Skye Residences | Extended Stay Residences Near Toronto AirportSkye Residences | Extended Stay Residences Near Toronto Airport
Skye Residences | Extended Stay Residences Near Toronto Airport
marketingjdass
 
Business Valuation Principles for Entrepreneurs
Business Valuation Principles for EntrepreneursBusiness Valuation Principles for Entrepreneurs
Business Valuation Principles for Entrepreneurs
Ben Wann
 
falcon-invoice-discounting-a-premier-platform-for-investors-in-india
falcon-invoice-discounting-a-premier-platform-for-investors-in-indiafalcon-invoice-discounting-a-premier-platform-for-investors-in-india
falcon-invoice-discounting-a-premier-platform-for-investors-in-india
Falcon Invoice Discounting
 
The-McKinsey-7S-Framework. strategic management
The-McKinsey-7S-Framework. strategic managementThe-McKinsey-7S-Framework. strategic management
The-McKinsey-7S-Framework. strategic management
Bojamma2
 

Recently uploaded (20)

What is the TDS Return Filing Due Date for FY 2024-25.pdf
What is the TDS Return Filing Due Date for FY 2024-25.pdfWhat is the TDS Return Filing Due Date for FY 2024-25.pdf
What is the TDS Return Filing Due Date for FY 2024-25.pdf
 
20240425_ TJ Communications Credentials_compressed.pdf
20240425_ TJ Communications Credentials_compressed.pdf20240425_ TJ Communications Credentials_compressed.pdf
20240425_ TJ Communications Credentials_compressed.pdf
 
一比一原版加拿大渥太华大学毕业证(uottawa毕业证书)如何办理
一比一原版加拿大渥太华大学毕业证(uottawa毕业证书)如何办理一比一原版加拿大渥太华大学毕业证(uottawa毕业证书)如何办理
一比一原版加拿大渥太华大学毕业证(uottawa毕业证书)如何办理
 
Search Disrupted Google’s Leaked Documents Rock the SEO World.pdf
Search Disrupted Google’s Leaked Documents Rock the SEO World.pdfSearch Disrupted Google’s Leaked Documents Rock the SEO World.pdf
Search Disrupted Google’s Leaked Documents Rock the SEO World.pdf
 
Putting the SPARK into Virtual Training.pptx
Putting the SPARK into Virtual Training.pptxPutting the SPARK into Virtual Training.pptx
Putting the SPARK into Virtual Training.pptx
 
Memorandum Of Association Constitution of Company.ppt
Memorandum Of Association Constitution of Company.pptMemorandum Of Association Constitution of Company.ppt
Memorandum Of Association Constitution of Company.ppt
 
Sustainability: Balancing the Environment, Equity & Economy
Sustainability: Balancing the Environment, Equity & EconomySustainability: Balancing the Environment, Equity & Economy
Sustainability: Balancing the Environment, Equity & Economy
 
Buy Verified PayPal Account | Buy Google 5 Star Reviews
Buy Verified PayPal Account | Buy Google 5 Star ReviewsBuy Verified PayPal Account | Buy Google 5 Star Reviews
Buy Verified PayPal Account | Buy Google 5 Star Reviews
 
anas about venice for grade 6f about venice
anas about venice for grade 6f about veniceanas about venice for grade 6f about venice
anas about venice for grade 6f about venice
 
Kseniya Leshchenko: Shared development support service model as the way to ma...
Kseniya Leshchenko: Shared development support service model as the way to ma...Kseniya Leshchenko: Shared development support service model as the way to ma...
Kseniya Leshchenko: Shared development support service model as the way to ma...
 
Improving profitability for small business
Improving profitability for small businessImproving profitability for small business
Improving profitability for small business
 
RMD24 | Debunking the non-endemic revenue myth Marvin Vacquier Droop | First ...
RMD24 | Debunking the non-endemic revenue myth Marvin Vacquier Droop | First ...RMD24 | Debunking the non-endemic revenue myth Marvin Vacquier Droop | First ...
RMD24 | Debunking the non-endemic revenue myth Marvin Vacquier Droop | First ...
 
FINAL PRESENTATION.pptx12143241324134134
FINAL PRESENTATION.pptx12143241324134134FINAL PRESENTATION.pptx12143241324134134
FINAL PRESENTATION.pptx12143241324134134
 
ModelingMarketingStrategiesMKS.CollumbiaUniversitypdf
ModelingMarketingStrategiesMKS.CollumbiaUniversitypdfModelingMarketingStrategiesMKS.CollumbiaUniversitypdf
ModelingMarketingStrategiesMKS.CollumbiaUniversitypdf
 
Premium MEAN Stack Development Solutions for Modern Businesses
Premium MEAN Stack Development Solutions for Modern BusinessesPremium MEAN Stack Development Solutions for Modern Businesses
Premium MEAN Stack Development Solutions for Modern Businesses
 
ENTREPRENEURSHIP TRAINING.ppt for graduating class (1).ppt
ENTREPRENEURSHIP TRAINING.ppt for graduating class (1).pptENTREPRENEURSHIP TRAINING.ppt for graduating class (1).ppt
ENTREPRENEURSHIP TRAINING.ppt for graduating class (1).ppt
 
Skye Residences | Extended Stay Residences Near Toronto Airport
Skye Residences | Extended Stay Residences Near Toronto AirportSkye Residences | Extended Stay Residences Near Toronto Airport
Skye Residences | Extended Stay Residences Near Toronto Airport
 
Business Valuation Principles for Entrepreneurs
Business Valuation Principles for EntrepreneursBusiness Valuation Principles for Entrepreneurs
Business Valuation Principles for Entrepreneurs
 
falcon-invoice-discounting-a-premier-platform-for-investors-in-india
falcon-invoice-discounting-a-premier-platform-for-investors-in-indiafalcon-invoice-discounting-a-premier-platform-for-investors-in-india
falcon-invoice-discounting-a-premier-platform-for-investors-in-india
 
The-McKinsey-7S-Framework. strategic management
The-McKinsey-7S-Framework. strategic managementThe-McKinsey-7S-Framework. strategic management
The-McKinsey-7S-Framework. strategic management
 

The Hidden Traps in Decision Making

  • 1. AUTHOR: ANKIT SAXENA The Hidden Traps in Decision Making
  • 2. In making decisions, you may be at the mercy of your mind’s strange workings. Here’s how to catch thinking traps before they become judgement disaster. By John S. Hammond, Ralph L. Keeney, and Howard Raffia
  • 3. Introduction Before deciding on a course of action, prudent managers evaluate the situation confronting them. Unfortunately, some managers are cautious to a fault – taking costly steps to defend against unlikely outcomes. Others are overconfident – underestimating the range of potential outcomes. And still others are highly impressionable – allowing memorable events in the past to dictate their view of what might be possible now. 3
  • 4. Introduction These are just three of the well-documented psychological traps that afflict most managers at some point, assert authors John S. Hammond, Ralph L. Keeney, and Howard Raiffa in their 1998 article. Still, more pitfalls distort reasoning ability or cater to our own biases. Examples of the latter include the tendencies to stick with the status quo, to look for evidence confirming one’s preferences, and to throw good money after bad because it’s hard to admit making a mistake. 4
  • 5. Introduction Luckily, techniques exist to overcome each one of these problems. For instance, since the way a problem is posed can influence how you think about it, try to reframe the question in various ways and ask yourself how your thinking might change for each version. Even if we can’t eradicate the distortions ingrained in the way our minds work, we can build tests like this into our decision-making processes to improve the quality of the choices we make. 5
  • 6. Decision Traps ANCHORING STATUS-QUO SUNK-COST CONFIRMATION FRAMING ESTIMATION Page 7 Page 8 Page 9 Page 10 Page 12 Page 11 6 GROUP THINK VAGUE VERBIAGE OVERCONFIDENCE BASE-RATE Page 13 Page 14 Page 16 Page 17
  • 7. The Anchoring Trap When considering a decision, the mind gives disproportionate weight to the first information it receives. Initial impressions, estimates, or data anchor subsequent thoughts and judgements. HOW THIS TRAP CAN AFFECT YOU OVERCOMING THIS TRAP Anchors take many guises. They can be as simple and seemingly innocuous as a comment offered by a colleague or a statistic appearing in the morning newspaper. They can be as insidious as a stereotype about a person’s skin color, accent, or dress. In business, one of the most common types of anchors is a past event or trend. Use alternative starting points Think about the problem on your own Seek information from other sources Be careful of setting anchors yourself 11 99 $30 $80 How much will you bid for this wine? Think of a random number 7
  • 8. The Status-Quo Trap We naturally look for reasons to do nothing to protect our ego from damage. Breaking the status quo means taking action, which means taking responsibility, thus, opening ourselves to criticism and regret. People sometimes, for example, inherit shares of stock that they would never have bought themselves. Although it would be a straightforward, inexpensive proposition to sell those shares and put the money into a different investment, a surprising number of people don’t sell. They find the status quo comfortable, and they avoid taking action that would upset it. “Maybe I’ll rethink it later,” they say. But “later” is usually never. Never think of your status quo as your only option Would you choose the status quo, if it wasn’t the status quo? Appeal of the status quo will change with time, so keep evaluating Avoid exaggerating the effort to make a change OUTCOME VALUE GainsLosses 1 unit 1 unit 1 unit 1.31 units People give a higher weight to what they already have making them attached to their current situation and goods. Kahneman and Tversky’s prospect theory (1992) showed that people felt losses more than they felt equivalent gains and this loss aversion prompts them to stay with the status quo. 8 HOW THIS TRAP CAN AFFECT YOU OVERCOMING THIS TRAP
  • 9. The Sunk-Cost Trap We often make choices that justify past choices, even when past choices no longer seem valid. Frequently, it’s because people are unwilling, consciously or not, to admit to a mistake. Acknowledging a poor decision in one’s personal life may be purely a private matter, involving only one’s self-esteem, but in business, a bad decision is often a very public matter, inviting critical comments from colleagues or bosses. If you fire a poor performer whom you hired, you’re making a public admission of poor judgment. It seems psychologically safer to let him or her stay on, even though that choice only compounds the error. Seek other perspectives Examine why an old mistake distresses you Don’t cultivate a failure-fearing culture Be on the lookout for sunk cost 9 HOW THIS TRAP CAN AFFECT YOU OVERCOMING THIS TRAP
  • 10. The Confirmation Trap This bias leads us to seek information that supports our existing instinct or point of view. There are two fundamental psychological forces at work here. The first is our tendency to subconsciously decide what we want to do before we figure out why we want to do it. The second is our inclination to be more engaged by things we like than by things we dislike – a tendency well documented even in babies. Naturally, then, we are drawn to information that supports our subconscious leanings. Examine all the available evidence Assign a devil’s advocate Avoid leading questions when seeking advice Be honest with yourself about your motives A Q 4 7 A) A, 4 B) A, 7 C) Q, 4 D) Q, 7 If a card has a vowel on one side, then it must have an even number on the other side. Most people choose A and 4 because these are the cards capable of confirming the statement, but confirming evidence doesn’t prove anything – the 4 card has no ability to invalidate the hypothesis. Flipping the 7 card, however, could provide valuable disconfirming evidence – a vowel on the other side means not all cards with vowels have an even number on the other side. 10 HOW THIS TRAP CAN AFFECT YOU OVERCOMING THIS TRAP
  • 11. The Framing Trap Framing bias occurs when people make a decision based on the way it’s presented, as opposed to just on the facts themselves. The same facts presented in another way can lead to different judgments or decisions. A frame can establish the status quo, introduce an anchor, highlight a sunk cost, or lead you to confirming evidence. Framing can be particularly important when assessing risk tolerance; advisors and clients alike need to make sure to develop a shared understanding of what constitutes risk and should decide how much risk is tolerable for a given client. Don’t automatically accept the initial frame Try positioning problems in a neutral, redundant way Challenge people’s questions with other frames Think hard throughout your decision making process OPTION 1: In Q3, our Earnings per Share (EPS) were $1.25, compared to expectations of $1.27 OPTION 2: In Q3, our Earnings per Share (EPS) were $1.25, compared to Q2, where they were $1.21 Clearly, option 2 does a better job of framing the earnings report. The way it is presented as an improvement over the previous quarter puts a more positive spin on the EPS number. 11 HOW THIS TRAP CAN AFFECT YOU OVERCOMING THIS TRAP
  • 12. Traps in Estimating and Forecasting Making estimates about time, distance, weight and volume are familiar, and we can get good at those estimations because we can get quick feedback. However, making forecasts with uncertain events is difficult. There are three traps within forecasting: Manage overconfidence by considering extremes Examine your assumptions and get more statistics to reduce recallability Manage prudence with honesty by telling people if estimates haven’t been adjusted Think hard throughout your decision making process Overconfidence We are often overconfident about our ability to forecast. Prudence Trap We err on the side of caution when faced with high-stakes decisions. Recallability Trap Our forecasts are often influenced by our own experiences. 12 HOW THIS TRAP CAN AFFECT YOU OVERCOMING THIS TRAP
  • 13. 13 Group Think Groupthink is a term developed by social psychologist Irving Janis in 1972 to describe suboptimal decisions made by a group due to group social pressures. HOW THIS TRAP CAN AFFECT YOU OVERCOMING THIS TRAP It is a phenomenon in which the ways of approaching problems or matters are dealt by the consensus of a group rather than by individuals acting independently. Essentially, groupthink occurs when a group makes faulty or ineffective decisions just for the sake of reaching an agreement. The following situations increase the likelihood of groupthink: Vague or abstract words can create confusing meanings in your receiver's mind. They state a general idea but leave the precise meaning to the receiver's interpretation. The following examples show vague or abstract words and ways to make them specific and precise: Vague Precise Many 1,000 or 500 to 1,000 Early 5 a.m. Hot 100 degrees Fahrenheit Most 89.9 percent Others Business administration students Poor student has a 1.6 grade point average (4.0 = A) Very rich A millionaire Soon 7 p.m., Tuesday Furniture An oak desk Group identity When there is strong group identity. Leader influence When a charismatic leader commands the group. Lack of knowledge When people lack personal knowledge of something or feel that other members of the group are more qualified. Cognitive load Where the group is placed under extreme stress or where moral dilemmas exist.
  • 14. 14 The Vague Verbiage Trap HOW THIS TRAP CAN AFFECT YOU OVERCOMING THIS TRAP Though vagueness often occurs unintentionally, it may also be employed as a deliberate rhetorical strategy to avoid dealing with an issue or responding directly to a question. Macagno and Walton note that vagueness "can also be introduced for the purpose of allowing the speaker to redefine the concept he wishes to use" (Emotive Language in Argumentation, 2014). The following examples show vague or abstract words and ways to make them specific and precise: Vague Precise Many 1,000 or 500 to 1,000 Early 5 a.m. Hot 100 degrees Fahrenheit Most 89.9 percent Others Business administration students Poor student has a 1.6 grade point average (4.0 = A) Very rich A millionaire Soon 7 p.m., Tuesday Furniture An oak desk Vague or abstract words can create confusing meanings in your receiver's mind. They state a general idea but leave the precise meaning to the receiver's interpretation.
  • 15. 15 The Vague Verbiage Trap A corporation’s earnings report needs to be interpreted and digested by both analysts and the market. The conference call accompanying the reports release, predominantly conducted by the CEO and CFO, conveys valuable information that facilitates this process. Word choice by managers affects information processing. In particular the use of uncertain words, such as “probably” and “maybe”, induces investors to respond less to earnings surprises. That is especially true for managers answers to analyst questions. We have established that earnings communicated by vague managers delay the responses of analysts and increase their uncertainty; they also cloud the picture for the majority of investors. These are major consequences but they do not explain why firms might hire vague managers. Could vague talk bring any benefits? The answer is “yes” in a second-best world where managers’ statements that prove to be excessive after the fact get punished. Arguably, this issue would be more pronounced for positive statements, if things later take a turn for the worse. This is especially relevant given the general tendency of analysts to issue overly optimistic forecasts (Hong and Kubik, 2003). Hence, if vague style indeed helps tone down positive expectations, we would expect to see fewer (or less) negative earnings surprises for vague managers. 1. Do managers tilt to vagueness when they have reason to do so, for example to cushion disappointing earnings when her options are coming due? 2. Our method for identifying style can be employed to study other speech characteristics. For instance, do managers differ in their propensity to use positive/negative, quantitative/qualitative, or other types of statements, and what are the capital market effects, if any, of such style differences that are identified? EARNINGS REPORT EXAMPLE Vague or abstract words can create confusing meanings in your receiver's mind. They state a general idea but leave the precise meaning to the receiver's interpretation.
  • 16. 16 The Overconfidence Trap The overconfidence bias is the tendency people have to be more confident in their own abilities, such as driving, teaching, or spelling, than is objectively reasonable. Below Average Average Above Average Percentage of managers (n = 300) 76% 24% Source: Montier (2006). Behaving badly. Self-reported belief in their fund-management ability relative to other fund managers For example, overconfidence can make people less cautious in their decisions, excessively trade their portfolios, and under-diversify, all of which lead to underperformance. A survey showed that most managers think they have above average analytical skills (a statistical impossibility.) Make data-driven and evidence-based decisions Corroborate claims with information from multiple sources Be more specific about predictions Perform multiple assessments of the same thing HOW THIS TRAP CAN AFFECT YOU OVERCOMING THIS TRAP
  • 17. 17 The Base-Rate Neglect Trap In finance, investors are prone to believe that a history of a remarkable performance of a given firm is ‘representative’ of a general performance that the firm will continue to generate into the future. Thus, they overreact to salient and similar information about firms past performance such as similar consecutive earnings surprises. This usually leads to a violation of the Bayes' theorem. Widen your perspective and scope of data Think probabilistically and apply the Bayes’ theorem List down potential causes for failure of companies Avoid narrow categorizations of companies P(A|B) = P(B|A) . P(A) P(B) P(B|A) → Probability of finding a pharma company among successful IPOs P(A) → Probability of a successful IPO P(B) → Probability of company being a pharma firm P(A|B) → Probability of a successful IPO by a new pharma company Investors should use this for accurate predictions Representativeness forces us to focus on this Base-rates that are often neglected HOW THIS TRAP CAN AFFECT YOU OVERCOMING THIS TRAP Base rate fallacy, or base rate neglect, is a cognitive error whereby too little weight is placed on the base, or original rate, of possibility (e.g., the probability of A given B.)
  • 18. Even though we shared some specific ways managers can guard against these traps, it’s important to remember, “the best defense is always awareness.” “Executives who attempt to familiarize themselves with these traps and the diverse forms they take will be better able to ensure that the decisions they make are sound and that the recommendations proposed by subordinates or associates are reliable.” Conclusion