Common Biases and Errors
To minimize effort and avoid difficult trade-offs, people tend to rely on experience, impulses, gut feelings and convenient “rules of thumb”. In many instances, these shortcuts are helpful. However, they can lead to severe distortions from rationality. The following material highlights the most common distortions.
i. Overconfidence Bias
It’s been said that “no problem in judgment and decisions making is more prevalent and more potentially catastrophic than over-confidence. Overconfidence bias is the tendency for a person to overestimate their abilities. When you start to rely on your own estimations and ideas of things rather than facts, you exhibit an overconfidence bias. It has a significant impact in decision making because how we think about things determines our actions.
The overconfidence bias can be divided into three key aspects:
It is thinking that you are better than you are.
It is the exaggerated belief that you are better than others.
It is the excessive faith that you know the truth.
ii. Anchoring Bias
The anchoring bias is a tendency to fixate on initial information. Once set, we then fail to adequately adjust for subsequent information. The anchoring bias occurs because our mind appears to give a disproportionate amount of emphasis to the first information it receives. So initial impressions, ideas, prices and estimates carry undue weight relative to information received later. Anchors are widely used by people in professions-such as advertising, management, politics, real estate and law- where persuasion skills are important. For example, when a prospective employer asks how much you were making in your prior job, you answer typically anchors the employer’s offer.
iii. Confirmation Bias
Confirmation bias is the tendency to search for, interpret, favor, and recall information in a way that confirms or supports one’s prior beliefs or values. People display this bias when they select information that supports their views, ignoring contrary information, or when they interpret ambiguous evidence as supporting their existing attitudes. This confirmation bias influences where we go to collect evidence because we tend to seek out places that are more likely to tell us what we want to hear. It also leads us to given too much weight to supporting information and too little to contradictory information. For example, a police detective may identify a suspect early in an investigation, but then may only seek confirming rather than disconfirming evidence. A medical practitioner may prematurely focus on a particular disorder early in a diagnostic session, and then seek only confirming evidence.
iv. Availability Bias
Availability bias is the tendency for people to base their judgements on information that is readily available to them. Events that evoke emotions, that are particularly vivid, or that have occurred more recently tend to be more available in our memory. As a result, we tend to be prone to overestimating unlikely events like an airplane crash. The availability bias can also explain why managers, when doing annual performance appraisals, tend to give more weight to recent behaviours of an employee than those behaviours of 6 or 9 months ago.
v. Representative Bias
Representativeness heuristic bias occurs when the similarity of objects or events confuses people’s thinking regarding the probability of an outcome. For example, managers frequently predict the performance of a new product by relating it to a previous product’s success. Or if three graduates from the same college were hired and turned out to be poor performers, managers may predict that a current job applicant from the same college will not be a good employee.
vi. Escalation of commitment
Escalation of commitment refers to saying with a decision even when there is clear evidence that it’s wrong. Escalation of commitment has obvious implications for managerial decisions. Many an organization has suffered large losses because a manager was determined to prove his or her original decision was right by continuing to commit resources to what was a lost cause from the beginning.
v. Randomness Error
Randomness error is when managers try to create meaning out of random events based on false information or superstition. For example, a manager could avoid making any decision due to the workday falling on Friday the 13th. Decision makers who are controlled by their superstitions can find it difficult or impossible to change routines or objectively process new information.
vi. Winner’s Curse
The winner’s curse occurs in competitive bidding. Some buyers will underestimate the value of an item and others will overestimate it, and the highest bidder (the winner) will be the one who overestimated the most. Therefore unless the bidders dramatically undervalue, there is a good chance that the “winner” paid too much for the item.
vii. Hindsight Bias
The hindsight bias is the tendency for us to believe falsely that we’d have accurately predicted the outcome of an event, after that outcome is actually known. People often believe that after an event has occurred, they would have predicted or perhaps even would have known with a high degree of certainty what the outcome of the event would have been before the event occurred. Hindsight bias may cause distortions of memories of what was known or believed before an event occurred, and is a significant source of overconfidence regarding an individual’s ability to predict the outcomes of future events. Examples of hindsight bias can be seen in the writings of historians describing outcomes of battles, physicians recalling clinical trials, and in judicial systems as individuals attribute responsibility on the basis of the supposed predictability of accidents.
Role of Creativity in Decision making
Creativity is vital for decision making, whether it is organizational decision or personal decision. One skill that significantly differentiates good decision makers from poor is creativity. The creativity is required to develop alternatives, enrich possibilities and imagine consequences. Creativity is required specially for solving problems which are non-repetitive and unique. Such problems cannot be solved by know methods and past experience is not enough in this case. A fresh approach, a new twist, a novel arrangement of recognized parts, or the addition of a different material or system is often necessary to find an acceptable solution. Preferably, a manager should be able to create original himself, at minimum, he needs awareness in spotting good ideas of other people.