Common Decision Biases and Errors

Introduction: This section will mention the learning objective and overview of the common biases and errors.

Objective

Upon finishing this learning module, you should be able to describe 8 common biases and errors.

Overview

To minimize effort and avoid trade-offs, people tend to rely too heavily on experience, impulses, gut feelings, and convenient rules of thumb.

Shortcuts can be helpful; however, they can lead to distortions of rationality.

8 Common Biases and Errors - This section will cover the definitions of the most common 8 biases and errors.

There are eight common biases and errors we need to know.

1. Overconfidence Bias

2. Hindsight Bias

3. Anchoring Bias

4. Confirmation Bias



5. Availability Bias

6. Escalation of Commitment

7. Randomness Error

8. Risk Aversion


We will watch the video first to know what the common biases and errors are, then we will know more one by one. 

Overconfidence Bias


Error in judgement that arises from being far too optimistic about one’s own performance

In a study of confidence intervals, when people said they were 90% confident that their answers were correct, their answer were correct only about 50% of the time.

Anchoring Bias

A tendency to fixate on initial information, from which one then fails to adequately adjust for subsequent information.

Anytime a negotiation takes place, so does anchoring.

When a prospective employer asks how much you made in your prior job, your answer typically anchors the employer's offer.



Conformation Bias

The tendency to seek out information that reaffirms past choices and to discount information that contradicts past judgements.

We are most prone to confirmation bias when we believe we have good information and strongly hold our opinions.

Availability Bias

The tendency for people to base their judgements on information that is readily available to them rather than complete data.

More people fear flying than fear driving in a car because the media gives much more attention to air accidents, we tend to overstate the risk of flying and understate the risk of driving.

Escalation of Commitment

An increased commitment to a previous decision despite negative information.

For example, a friend has been dating a man for about four years. Although she admits that things are not going well, she is determined to marry him anyway. Her justification:"I have a lot invested in the relationship."

Randomness Error

The tendency of individuals to believe that they can predict the outcome of random events.

Decision making suffers when we try to create meaning in random events, particularly when we turn imaginary patterns into superstitions.

Risk Aversion

The tendency to prefer a sure gain of a moderate amount over a riskier outcome, even if the riskier outcome might have a higher expected payoff.

To offset the risks inherent in a commission-based wage, companies pay commissioned employees considerably more than they do those on straight salaries.

Hindsight Bias

The tendency to believe falsely, after an outcome of an events is actually known, that one could have accurately predicted that outcome.

The hindsight bias reduces our ability to learn from the past.

It lets us think that we are better predictors than we really are, and can make us falsely confident.

Test - This section is going to have quizzes on the materials covered in the learning module.

What type of bias relies too heavily on one piece of information in making a final decision?

  • Validation
  • Anchoring
  • Hindsight
  • Escalation of Commitment

ABC company invested lots of time and money in their latest line of gardening shoes. They decide to keep selling and marketing the shoes in the face of increasing numbers of complaints about their poor quality.  Why would the ABC company do this?

  • Confirmation bias.
  • Risk aversion bias.
  • Availability bias.
  • Hindsight bias.
  • Escalation of commitment bias.

Why is it important to consider common biases when making a decision?

  • Because they are prejudices or decisions that are not fair and balanced, and can lead to poor overall decision making.
  • Because they are ethical situations that arise from uneducated views, and cost a great deal of money.
  • Because they are factors that are independent of decision-making yet have an eventual impact.

How might a manager demonstrate confirmation bias on the job?

  • By only pointing out data that supports his/her positions.
  • By learning toward using certain materials that are easily available.
  • By demonstrating clear understanding after a decision.
  • By continuing to sell bad products.

Matching the phases to the definitions.

  • Availability Bias
    The tendency for people to base their judgements on information that is readily available to them rather than complete data
  • Confirmation Bias
    The tendency to seek out information that reaffirms past choices and to discount information that contradicts past judgements
  • Hindsight Bias
    the tendency to believe falsely, after an outcome of an events is actually known, that one could have accurately predicted that outcome
  • Risk Aversion
    The tendency to prefer a sure gain of a moderate amount over a riskier outcome, even if the riskier outcome might have a higher expected payoff.

Congratulation ! You have completed the entire learning module for the common biases and error.

References

Langton, N., Robbins, S. P., Judge, T., Breward, K. (2016). Organizational behavior: concepts, controversies, applications (7th ed.). Toronto: Person.

All pictures sourced from Google.ca