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Managerial Decision Making – Biases

Managerial Decision Making Kristen Betts March 27, 2011 There are several biases that affect the judgment of managers, however, here are just a few that are relatively common; availability heuristic, representativeness heuristic, the affect heuristic and the positive hypothesis testing. It is truly intriguing to understand how each of them affects reasoning and judgment. The Availability heuristic is when individuals look for frequency of information, likely causes or even probability to an event and it occurs quickly and readily available in their memory.

An occurrence where emotions are involved will be easier to retrieve than one without emotion. Events that happen with more frequency are also easier to retrieve since they are easily remembered. Another bias is called the Representativeness heuristic in which people will look for similar traits which relate to stereotypes already formed. Managers use this bias by analyzing an employee’s traits, experience and performance by placing them in a category of other individuals who have fit the same mold. This can be very useful but it can also create false biases where discriminations can be called to play unintentionally.

Positive Hypothesis Testing occurs when people analyze a situation by basing on their previous experience of either being in that situation before or knowing of that situation occurring. This brings about conclusions being made without evidence being present. This brings about another group of biases. The Confirmation bias is where individuals “will search for and interpret evidence in a way that supports the conclusions we favored at the outset. ” (Bazerman, p. 9) Anchoring can also be brought about when the answer is based on a set of information that sways judgment.

Overconfidence and Hindsight biases occur when a person believes too highly in how accurate their beliefs are and when asking how things could have turned out, respectively. Survey The questions for the surveys I chose were from Max Bazerman and Dan Moore’s book, Judgment in Managerial Decision Making. Within Chaper 2, Common Biases, I chose to use Problems 1, 2, 5, 9 and 10 (surveys used are attached at the end of the report). In Table 1. 1 and 1. 2 you will see the summarized results of the surveys taken. Table 1. 2 displays cells in gray to indicate those answers that were changed after I explained to the subjects the biases that exist.

Please reference Survey #1 at the end of this report. Question 1 (please rank in order the following causes of death in the United States between 1990 and 2000) relates to the Availability Heuristic in which people will make their selections based on those options they have seen or heard of most recently. The media is very good at skewing our judgment by highly publicizing negative events such as murders, car accidents, drugs and etc. Question 2 (estimate the percentage of words in the English language that begin with the letter “a”), uses the Retrievability bias which is based on memory structures.

As the question is read, people will go use their memory to come up with an estimated percentage of how many words begin with the letter a. Some came very close to answering this question correctly. Question 3 (For a period of one year, each hospital recorded the days on which more than 60% of the babies born were boys. Which hospital do you think recorded more such days? ) is relative to the sample size given in the question. It would be sensible to think that both hospitals would have the same percentage of boys, however, the smaller the sample size the higher the percentage.

This bias is used in marketing and advertising when references to sample sizes are made to make consumers think the product is highly recommended without offering the total sample size. Question 4 (take the last three digits of your phone number and add the number one to the front of the string, so that you now have four digits) is relative to the Anchoring bias where the individual uses the number created in order to determine the year the Taj Mahal was completed. Had that number not been created initially, their answers may have been entirely different. The last question is based on Conjunctive and Disjunctive Events bias.

This occurs when planning a multiple stage event, conjunctive events will generally give an explanation as to the problems that typically occur. (Bazerman, p. 34) When expectations fail within a project, disjunctive biases can arise which causes individuals to expect the worst outcome. Discussions with Subjects For the most part after I explained the biases to which people hold, they agreed that it made sense. One individual took the survey and used Google to come up with their answers. Once I indicated this was to be done on their own they did the second survey without the computer but remembered most of their answers from the first one.

The reactions I observed from the subjects were quite interesting. After explaining the biases related to each of the questions, the subjects I used were in agreement in how it made sense and how it was reasonable to understand how biases can skew decisions and judgment. Some were very interested in hearing more about the topic and others had already heard of these biases from their prior education. A couple argued with me on the actual date of the Taj Mahal being completed as well as the answer to the marble question. But all in all, they found the survey interesting as did I.

After the discussions were completed, the second survey was given to them to complete. I’ve noted in the Table 1. 2 in gray where the subjects changed their answers from the first survey. Interestingly enough, there was only one individual who did not change her answers at all from her first survey even though I had rewritten the questions. Her original answers were very close to the answers, and in my biased opinion she is a very smart person who holds two masters’ degrees. People in general have a wide variety of biases for many different reasons.

When becoming a manager it’s truly important to realize these exist and take a step back to analyze the situation and try to provide non-biased answers in order to make the right choices for the right reasons. Works Cited Bazerman, M. H. (2009). Judgement in Managerial Decision Making. Hoboken: John Wiley & Sons Incorporated. Table 1 – Survey #1| | Question 1| Question 2| Question 3| Question 4| Question 5| Subject| Tobacco (1)| Poor diet & physical activity (2)| Motor vehicle accidents (3)| Firearms(4)| Illicit drug use (5)| 6%| The maller hospital| Number subject used| Before or after| 1648| C| A| B| A| 2| 1| 3| 5| 4| 4%| About the same| 1131| After| 1650| a| b| c| B| 2| 1| 3| 5| 4| 8%| The smaller hospital| 1408| Before | 700 AD| c| a| b| C| 1| 3| 5| 4| 2| 10%| About the same| 1841| After| 1940| b| a| c| D| 2| 1| 3| 4| 5| 26%| About the same| 1720| Before| 1653| b| a| c| E| 2| 3| 1| 4| 5| 25-30%| The smaller hospital| 1301| After| After 1600| a| c| b| | | | | | | | | | | | | | | Table 2 – Survey #2| Question 1 – Answer| Question 2| Question 3| Question 4| Question 5| Subject| Tobacco (1)| Poor diet & physical activity (2)| Motor vehicle accidents (3)| Firearms (4)| Illicit drug use (5)| 6%| The smaller hospital| Number subject used| Before or after| 1648| A| C| B| A| 4| 5| 3| 1| 2| 4%| About the same| 1131| After| 1650| c| a| b| B| 4| 5| 3| 1| 2| 8%| The smaller hospital| 1408| After| 1650| b| c| a| C| 1| 3| 5| 4| 2| 10%| About the same| 1841| After| 1940| a| c| b| D| 2| 1| 4| 3| 5| 26%| The smaller hospital| 1720| Before| 1653| a| b| c| E| 4| 3| 5| 2| 1| 25%| The smaller hospital| 1301| After| 1600| c| b| a|

Survey #1 Question 1 Please rank in order the following causes of death in the United States between 1990 and 2000, placing a 1 next to the most common cause, 2 next to the second most common, etc. ____ Tobacco ____ Poor diet and physical inactivity ____ Motor vehicle accidents ____ Firearms ____ Illicit drug use Question 2 Estimate the percentage of words in the English language that begin with the letter “a”. Question 3 A certain town is served by two hospitals. In the larger hospital, about 45 babies are born each day.

In the smaller hospital, about 15 babies are born each day. As you know, about 50% of all babies are boys. However, the exact percentage of babies born varies from day to day. Sometimes it may be higher than 50 percent, sometimes lower. For a period of one year, each hospital recorded the days on which more than 60% of the babies born were boys. Which hospital do you think recorded more such days? a. The larger hospital b. The smaller hospital c. About the same (that is within 5% of each other) Question 4 Take the last three digits of your phone number.

Add the number one to the front of the string, so that you now have four digits. Think of that number as a year. Now try to estimate they year the Taj Mahal was completed. Was it before or after the date made by your number? ____ Before ____ After On the line below, please make your best estimate of the actual year in which the Taj Mahal was completed. __________ Question 5 Which of the following instances appears most likely? Which appears second most likely? a. Drawing a red marble from a bag containing 50% red marbles and 50% white marbles. b.

Drawing a red marble seven times in succession, with replacement (i. e. a selected marble is put back into the bag before the next marble is selected), from a bag containing 90% red marbles and 10% white marbles. c. Drawing at least one red marble in seven tries, with replacement, from a bag containing 10% red marbles and 90% white marbles. Survey # 2 Question 1 Please rank in order the following causes of death in the United States between 1990 and 2000, placing a 1 next to the least common cause, 2 next to the second least common, etc. ____ Poor diet and physical inactivity ___ Illicit drug use ____ Motor vehicle accidents ____ Tobacco ____ Firearms Question 2 What percentage of words begin with the letter “a”? Question 3 Two hospitals are located in the same town. In the larger hospital, each day about 45 babies are born. In the smaller hospital, each day 15 babies are born. Approximately 50% of all babies are boys. From day to day the exact percentage of babies born varies. Sometimes it’s higher, sometimes it’s lower. In one year, each hospital recorded the number of days where more than 60% of the babies born were boys.

Which hospital recorded more days in which this occured? a. The smaller hospital b. About the same (that is within 5% of each other) c. The larger hospital Question 4 Write down the last three digits of your phone number. Add 1 to the front so have four digits. Pretend this number is a year. Now estimate the year the Taj Mahal was completed. Was it before or after the date made by your number? ____ Before ____ After On the line below, please make your best estimate of the actual year when the Taj Mahal was completed. _________ Question 5 Which appears most likely? Which appears second most likely? Replacement is placing a selected marble back into the bag before the next marble is selected. a. Drawing a white marble seven times in a row, with replacement, from a bag that contains 90% white marbles and 10% red marbles. b. Drawing at least one white marble in seven tries, with replacement, from a bag that contains 90% red marbles and 10% white marbles. c. Drawing a red marble from a bag that contains 50% white marbles and 50% red marbles.