Common traps in decision making

In the previous post, we have discussed about different types of decisions as well as different decision making models. However, no matter which model is used, there are some common traps that we can fall in while making decisions. The purpose of this post is to introduce those traps and suggest how to avoid them.

Decision making traps

According to Hammond, Keeney and Raiffa (2006), there are six psychological traps that are particularly likely to undermine decisions:

1. The anchoring trap
The anchoring trap refers to the tendency for us to rely too heavily on the first information we receives. It is very common that initial impressions, estimates, or data can anchor our subsequent thoughts and judgments.

For example: When we are asked these two questions in sequence: “Is the population of Turkey greater than 35 million?” and “What is your best estimate of Turkey’s population?”, it is very likely that the number 35 million in the first question will influence your answer for the second question. To be more precise, your answer for the second question will be likely around 35 million, even though this number may not be in the reasonably accurate range.

Here are several ways to avoid or minimize the impact of the anchoring trap:
  • Always view a problem from different perspectives.
  • Think about the problem on your own before consulting others.
  • Be open-minded.
  • Be careful to avoid anchoring your advisers and consultants.
  • Be particularly wary of anchors in negotiations.

2. The status-quo trap
By nature, people resist to changes and therefore, decision makers usually have a strong bias toward alternatives that prolong the status quo.

For example: When people inherits shares of stock that they would never have bought themselves, most of them don’t sell the shares and put the money into a different investment. Even though selling those shares is a straightforward and inexpensive alternative, people usually find the status quo comfortable and they avoid taking action that would upset it.

Here are several ways to avoid the status quo trap:
  • Always remind yourself of your objectives and examine how they would be served by the status quo.
  • Never think of the status quo as your only alternative.
  • Ask yourself whether you would choose the status-quo alternative if, in fact, it weren’t the status quo.
  • Avoid exaggerating the effort or cost involved in switching from the status quo.
  • Remember that the desirability of the status quo will change over time.
  • If you have several alternatives that are superior to the status quo, don’t default to the status quo just because you are having a hard time picking the best alternative.

3. The sunk-cost trap
The sun-cost trap refers to the tendency that we are likely to make choice in a way that justifies past choices, even when the past choices no longer seem valid. This happens because we are unwilling, consciously or not, to admit to our past mistakes.

For example: We may have refused to sell a stock at a loss, forgoing other, more attractive investments. Or we may have poured enormous effort into improving the performance of an employee whom we knew we shouldn’t have hired in the first place.

Here are several ways to avoid the sunk-cost trap:
  • Seek out and listen carefully to the views of people who were uninvolved with the earlier decisions and who are hence unlikely to be committed to them.
  • Examine why admitting to an earlier mistake distresses you.
  • Don’t cultivate a failure-fearing culture that leads employees to continue their mistakes.

4. The confirming-evidence trap
The confirming-evidence trap refers to the bias that leads us to seek out information that supports our existing instinct or point of view while avoiding information that contradicts it. The confirming-evidence bias not only affects where we go to collect evidence but also how we interpret the evidence we do receive, leading us to give too much weight to supporting information and too little to conflicting information.

For example: An CEO of a company may have a concern that US dollar may appreciate against other currencies. Before making the decision to adjust the company’s plan to adapt to that assumption, he calls up an acquaintance, CEO of another similar company to check her reasoning. She presents a strong case that other currencies are about to weaken significantly against the dollar. If the CEO makes his decision right after being confirmed, he may fall into the confirming-evidence trap.

Here are several ways to avoid the confirming-evidence trap:
  • Avoid the tendency to accept confirming evidence without question.
  • Get someone you respect to play devil’s advocate, to argue against the decision you’re contemplating.
  • Ask yourself if you are really gathering information to help you make a smart choice or you are just looking for evidence confirming what you would like to do?
  • Do not ask leading questions that invite confirming evidence when seeking advice from others.

5. The framing trap
The framing trap refers to the tendency of decision makers to be influenced by the way that a situation or problem is presented.

For example: When making a purchase, customers tend to prefer a statement such as “90% fat free” as apposed to “10% fat” even though those two options are actually the same.

Here are several ways to avoid the framing trap:
  • Always try to reframe the problem in various ways and look for distortions caused by the frames.
  • Try posing problems in a neutral, redundant way that combines gains and losses or embraces different reference points.
  • When others recommend decisions, examine the way they framed the problem and challenge them with different frames.
6. The estimating and forecasting traps
This type of traps can be split into three:
  • The overconfidence trap refers to the tendency that individuals overestimate their ability to predict future events.
  • The prudence trap takes the form of overcautiousness, or prudence: When faced with high-stakes decisions, we tend to adjust our estimates or forecasts “just to be on the safe side”.
  • The recallability trap refers to the tendency that we can be overly influenced by dramatic events in the past, those that leave a strong impression on our memory.

Example for the overconfidence trap: 82% of the drivers surveyed feel they are in the top 30% of safe drivers and 86% of students at the Harvard Business School say they are better looking than their peers.
Example for the prudence trap: Engineers design weapons to operate under the worst possible combination of circumstances, even though the likeliness of those circumstances is actually very rare.
Example for the recallability trap: People usually exaggerate the probability of rare but catastrophic occurrences such as plane crashes because they get disproportionate attention in the media.

Here are several ways to avoid the estimating and forecasting traps:
  • To reduce the effects of overconfidence in making estimates, always start by considering the extremes, the low and high ends of the possible range of values.
  • To avoid the prudence trap, always state your estimates honestly and explain to anyone who will be using them that they have not been adjusted.
  • To minimize the distortion caused by variations in recallability, examine all your assumptions to ensure they’re not unduly influenced by your memory.

Reference:
Hammond J. S., Keeney R. L. and Raiffa H., 2006. The Hidden Traps In Decision Making. Harvard Business Review, January 2006, pp.118-126.

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Understanding decision making

1. Introduction
Decision making is a mental process of making choice among alternative courses of action, which may also include inaction. In organizations, decision making is a very popular activity that can happen at all levels. The purpose of this post is to provide some basic understandings about decision making as as different types of decisions and the four decision-making models. More practical discussion about decision making will be provided in later posts.

Decision making

2. Types of decisions
In general, decisions can be categorized into two types:
  • Programmed decisions: This type of decisions is straightforward and occurs frequently enough that we develop an automated response to them. Example of this type is the decisions of what to wear, what to eat, and which route to take when we travel between our home and the office.
  • Non-programmed decisions: This type of decisions is unique and important that requires  conscious thinking, information gathering, and careful consideration of alternatives. Decision of which job offer to take or which business model to follow is a good example of this type.
In organizations, decisions can be classified into three categories based on the level at which they occur:
  • Strategic decisions: are made by top management team and set the course of an organization.
  • Tactical decisions: are made by managers and are about how things will get done.
  • Operational decisions: are made each day by employees to make the organization run.

More details about the three categories of decisions can be found in the following table:

Three types of decisions in organization

3. Decision-making models
According to Bauer and Erdogan (2009), there are four models of decision-making:

Rational decision-making model:
This model describes a series of steps that decision makers should consider if their goal is to maximize the quality of their outcomes:

8_steps_in_rational_decision_making_model

The disadvantage of this model is that it involves a number of unrealistic assumptions. It assumes that people know all the available choices, that they have no perceptual biases, and that they want to make optimal decisions. Research shows that this model does not represent how decisions are frequently made within organizations.

Bounded rationality model:
According to this model, individuals knowingly limit their options to a manageable set and accept the first alternative that meets their minimum criteria without conducting an exhaustive search for alternatives. This model helps us to make “good enough” decisions.

Intuitive decision-making model:
This model refers to arriving at decisions without conscious reasoning. This model is usually used under challenging circumstances such as time pressures, constraints, a great deal of uncertainty or changing conditions. In this model, only one choice is considered at a time and if it does not meet the criteria then it is discarded and a new choice is tested until a workable one is found.

Creative decision-making model:
This model refers to the generation of new, imaginative ideas and it has five steps:

5_steps_in_creative_decision_making

  • Problem recognition: The need for problem solving becomes apparent.
  • Immersion: Consciously thinks about the problem and gathers information.
  • Incubation: Sets the problem aside and does not think about it for a while. At this time, the brain is actually working on the problem unconsciously.
  • Illumination: The insight moment when the solution to the problem becomes apparent, sometimes when it is least expected.
  • Verification & application: Verifies the feasibility of the solution and implements the decision

The following table suggests which decision-making model to use in a particular situation:

Decision making models

Reference:
Bauer, T. and Erdogan, B., 2009. Organizational Behavior. 1st ed. Flat World Knowledge, Inc.