The Institute for Government welcomes Professor Max Bazerman, an expert in the field of applied behavioural psychology, to discuss the cognitive biases which undermine good decision making in organisations, and the unique role for leaders in helping to correct them. He presents themes from his latest book, The Power of Noticing: What the Best Leaders See. From Bernie Madoff’s Ponzi scheme, to the failure to anticipate terrorist attacks on 9/11, Professor Bazerman argues that individuals and organisations become trapped in familiar patterns of thinking and potential threats go ignored until it’s too late. Even when the information we need is available, we often fail to notice it. Max Bazerman is Jesse Isidor Straus Professor of Business Administration at the Harvard Business School and the Co-Director of the Center for Public Leadership at the Harvard Kennedy School.

1. Decision Making, Noticing, andDecision Making, Noticing, and
the Use of Behavioral Insightsthe Use of Behavioral Insights
Max H. BazermanMax H. Bazerman
Harvard UniversityHarvard University

2. Decision BiasesDecision Biases
Daniel Kahneman’s Thinking, Fast and SlowDaniel Kahneman’s Thinking, Fast and Slow
(over a million copies sold in the UK alone)(over a million copies sold in the UK alone)

3. Asian Disease ProblemAsian Disease Problem
(from Tversky & Kahneman, 1981)(from Tversky & Kahneman, 1981)
PROBLEM 1 (N=152):PROBLEM 1 (N=152):
Imagine that the US is preparing for the outbreak of an unusual AsianImagine that the US is preparing for the outbreak of an unusual Asian
disease, which is expected to kill 600 people. Two alternative programsdisease, which is expected to kill 600 people. Two alternative programs
to combat the disease have been proposed. Assume that the exactto combat the disease have been proposed. Assume that the exact
scientific estimates of the consequences of the programs are as follows.scientific estimates of the consequences of the programs are as follows.
Program A: If Program A is adopted, 200 people will be saved [72%].Program A: If Program A is adopted, 200 people will be saved [72%].
Program B: If Program B is adopted, there is 1/3 probability that 600Program B: If Program B is adopted, there is 1/3 probability that 600
people will be saved, and 2/3 probability thatpeople will be saved, and 2/3 probability that no people will beno people will be
saved [28%].saved [28%].
Which of the two programs would you favor?Which of the two programs would you favor?

4. Asian Disease ProblemAsian Disease Problem
(from Tversky & Kahneman, 1981)(from Tversky & Kahneman, 1981)
PROBLEM 2 (N=155):PROBLEM 2 (N=155):
Imagine that the US is preparing for the outbreak of an unusual AsianImagine that the US is preparing for the outbreak of an unusual Asian
disease, which is expected to kill 600 people. Two alternative programsdisease, which is expected to kill 600 people. Two alternative programs
to combat the disease have been proposed. Assume that the exactto combat the disease have been proposed. Assume that the exact
scientific estimates of the consequences of the programs are as follows.scientific estimates of the consequences of the programs are as follows.
Program C: If Program C is adopted 400 people will die [22%].Program C: If Program C is adopted 400 people will die [22%].
Program D: If Program D is adopted there is 1/3 probability thatProgram D: If Program D is adopted there is 1/3 probability that
nobody will die, and 2/3 probability that 600 people will dienobody will die, and 2/3 probability that 600 people will die
[78%].[78%].
Which of the two programs would you favor?Which of the two programs would you favor?

5. Other BiasesOther Biases
FramingFraming
AnchoringAnchoring
EgocentrismEgocentrism
Discounting the futureDiscounting the future
VividnessVividness
Ignoring Base RatesIgnoring Base Rates
Mythical Fixed PieMythical Fixed Pie
Escalation of CommitmentEscalation of Commitment
Arbitrary Mental AccountingArbitrary Mental Accounting
Ignoring the Decision of OthersIgnoring the Decision of Others

6. The U.S. versus TobaccoThe U.S. versus Tobacco
1999 – The US DOJ files suit under RICO1999 – The US DOJ files suit under RICO
a)a) FraudFraud
b)b) ConspiracyConspiracy

7. The FraudsThe Frauds
1)1) Selling addictive substances while denying doing so.Selling addictive substances while denying doing so.
2)2) Manipulating nicotine while denying doing so.Manipulating nicotine while denying doing so.
3)3) Leading the public to make the false inference thatLeading the public to make the false inference that
light/low tar products are less hazardous than fulllight/low tar products are less hazardous than full
flavored brands.flavored brands.
4)4) Denying the effects of second hand smoke despiteDenying the effects of second hand smoke despite
having data to the contrary.having data to the contrary.
5)5) Denying the primary health effects of smokingDenying the primary health effects of smoking
despite having internal studies that clarify thesedespite having internal studies that clarify these
effects.effects.
6)6) Making false claims about conducting independentMaking false claims about conducting independent
research.research.
7)7) Suppressing evidence on health effects of smoking.Suppressing evidence on health effects of smoking.

8. RecommendationsRecommendations
My testimony concluded with the argumentMy testimony concluded with the argument
that absent significant court intervention,that absent significant court intervention,
misconduct would occur in the future. Mymisconduct would occur in the future. My
recommendation to the court, based on therecommendation to the court, based on the
assumption that D.O.J. had proven liability,assumption that D.O.J. had proven liability,
was that the court should appoint monitors towas that the court should appoint monitors to
the tobacco companies to consider appropriatethe tobacco companies to consider appropriate
structural changes, not limited to, butstructural changes, not limited to, but
including removal of senior management.including removal of senior management.

9. Timing of My WorkTiming of My Work
1) Hired: 3/10/051) Hired: 3/10/05
2) Filed expert report: 3/21/052) Filed expert report: 3/21/05
3) Deposed: 4/10/05 (7 hours, 10 attorneys on the other side)3) Deposed: 4/10/05 (7 hours, 10 attorneys on the other side)
4) Mid-April: Submitted written direct testimony4) Mid-April: Submitted written direct testimony
5) 4/30/05: At the beginning of a prep session for 5/4/055) 4/30/05: At the beginning of a prep session for 5/4/05
court appearance, I was asked to amend my testimonycourt appearance, I was asked to amend my testimony
6) 5/4/05: Testified in court6) 5/4/05: Testified in court
7) 5/4-6/05: Prepared for Daubert challenge7) 5/4-6/05: Prepared for Daubert challenge
8) 5/6-13/05: Helped DOJ prepare for Fischel (my opposite)8) 5/6-13/05: Helped DOJ prepare for Fischel (my opposite)
testimonytestimony
Total: 214 hoursTotal: 214 hours

11. 11

12. 12

13. 9/119/11
The U.S. government knew that terrorists were willing to become
martyrs for their cause, and that their hatred toward the United
States was increasing.
1993: Terrorists had previously bombed the World Trade Center.
1994: Terrorists hijacked an Air France airplane and made an
aborted attempt to turn the airplane into a missile aimed at the Eiffel
Tower.
1994: Terrorists had also failed in an attempt to simultaneously
hijack twelve U.S. commercial airplanes in Asia.
Airline passengers knew how simple it was to board an airplane with
items, such as small knives, that could be used as weapons.

14. EnronEnron
How could Arthur Andersen vouch for the financial health of Enron, concealing
billions of dollars in debt from its shareholders?
At the heart of the Enron debacle is a conflict of interest that experts have
been warning about for years. In 2000, multiple scholars testified before the
SEC that the rapid growth of the Big 5 accounting firms’ consulting divisions
have made impartial financial audits almost impossible.
Psychologists have known for a long time that individuals with a vested self-
interest, even honest ones, are incapable of unbiased (independent) judgment.
a) Auditors have made tremendous profit from selling consulting
services to their audit clients.
b) Auditors want to be rehired.
c) The personnel on the audit often take jobs with the client firm.

15. June 17, 2005June 17, 2005
1) Waking up in London at 5 AM and reading about1) Waking up in London at 5 AM and reading about
Matthew Myers in the New York Times.Matthew Myers in the New York Times.
2) I realized that I should have acted six weeks2) I realized that I should have acted six weeks
earlier, and it was time to act now.earlier, and it was time to act now.
3) My story was covered by the Washington Post, and3) My story was covered by the Washington Post, and
led to congressional letters demanding anled to congressional letters demanding an
investigation.investigation.
4) But, I recognized my earlier failure, and4) But, I recognized my earlier failure, and
appreciated what Matthew Myers had done.appreciated what Matthew Myers had done.

16. What Can You Do More Broadly?What Can You Do More Broadly?
1) Put it on your agenda to be a first-class noticer (Warren1) Put it on your agenda to be a first-class noticer (Warren
Bennis). Focusing is good, but sometimes you need to take aBennis). Focusing is good, but sometimes you need to take a
look around.look around.
2) Take an outsider’s view.2) Take an outsider’s view.
3) Audit your organization. Identify changes that will help to3) Audit your organization. Identify changes that will help to
create a noticing organization.create a noticing organization.
4) When something is wrong, figure out what it is (tobacco4) When something is wrong, figure out what it is (tobacco
story).story).

17. The Role of NoticingThe Role of Noticing
 What problems exist that do not makeWhat problems exist that do not make
sense?sense?
 What are the barriers to fixing theseWhat are the barriers to fixing these
problems?problems?
 Are there viable solutions?Are there viable solutions?

18. Using Behavioral Insights toUsing Behavioral Insights to
Improve GovernmentImprove Government
Thaler and Sunstein’s NudgeThaler and Sunstein’s Nudge
The Behavioral Insights Team – led by DavidThe Behavioral Insights Team – led by David
HalpernHalpern
The UK’s What Works ProjectThe UK’s What Works Project
New Demonstrations throughout the WorldNew Demonstrations throughout the World

19. 2003 Organ Donation Rates2003 Organ Donation Rates
(Johnson and Goldstein, 2003)(Johnson and Goldstein, 2003)

20. Gender Equality Nudge:Gender Equality Nudge:
Comparative EvaluationComparative Evaluation

23. “Today, 94 of the
FTSE 100 companies
count women on
their boards as do
over two thirds of
all FTSE 350
companies.”

25. Two Types of PromisesTwo Types of Promises
(Shu, Mazur, Gino, Ariely, and Bazerman)(Shu, Mazur, Gino, Ariely, and Bazerman)

27. Math PuzzlesMath Puzzles

28. Design

29. Two Types of PromisesTwo Types of Promises
(Shu, Mazur, Gino, Ariely, and Bazerman)(Shu, Mazur, Gino, Ariely, and Bazerman)
1) It works in the lab –
with replication
2) It works on reporting
mileage to an insurance
company
3) We believe it will work
on collecting taxes
4) Two large trials
ongoing

30. Research Going on Harvard’sResearch Going on Harvard’s
Behavioral Insights GroupBehavioral Insights Group
1)1) Employees at a business-process outsourcing company based in Bangalore, whenEmployees at a business-process outsourcing company based in Bangalore, when
asked to reflect for the last 15 minutes of each day on the lessons they had learnedasked to reflect for the last 15 minutes of each day on the lessons they had learned
that day, increased performance by 22.8 percent (Francesca Gino, HBS)that day, increased performance by 22.8 percent (Francesca Gino, HBS)
2)2) Sending a letter to eight million US households comparing household energy use toSending a letter to eight million US households comparing household energy use to
that of their neighbors can reduce energy consumption equivalent to that used bythat of their neighbors can reduce energy consumption equivalent to that used by
St. Louis and Portland (Todd Rogers, HKS)St. Louis and Portland (Todd Rogers, HKS)
3)3) Opt-out defaults greatly increase savings rates at every stage of the savings lifecycle,Opt-out defaults greatly increase savings rates at every stage of the savings lifecycle,
including savings plan participation, contributions, asset allocation, and rolloversincluding savings plan participation, contributions, asset allocation, and rollovers
(Brigitte Madrian, HKS, David Laibson, FAS, and John Beshears, HBS)(Brigitte Madrian, HKS, David Laibson, FAS, and John Beshears, HBS)
4)4) Plan-making and stressing high turnout increases the likelihood that an individualPlan-making and stressing high turnout increases the likelihood that an individual
will vote (Todd Rogers, HKS)will vote (Todd Rogers, HKS)
5)5) When tax preparers at H&R Block helped some low- and moderate income clientsWhen tax preparers at H&R Block helped some low- and moderate income clients
fill out the FAFSA using existing financial data from the IRS, there was a significantfill out the FAFSA using existing financial data from the IRS, there was a significant
boost in the rate at which participants in the program applied for financial aid, theboost in the rate at which participants in the program applied for financial aid, the
number who received aid and the amount they got, and the proportion ofnumber who received aid and the amount they got, and the proportion of
participants who enrolled in college (Bridget Terry Long, HGSE)participants who enrolled in college (Bridget Terry Long, HGSE)