Biases And Errors In Decision Making.
Decision makers engage in bounded rationality, but they also allow systematic biases and errors to creep into their judgments. These can lead to severe distortions of rationality.
Overconfidence Bias
When we are given factual questions and asked to judge the probability that our answers are correct, we tend to be fairly optimistic, which is called overconfidence bias. When people say they are about 65 to 70 percent confident they are right, they are actually correct only 50 percent of the time.
From an organizational standpoint, one of the most interesting findings related to overconfidence is that individuals whose intellectual and interpersonal abilities are weakest are most likely to overestimate their performance and ability.
There is also a negative relationship between entrepreneurs´ optimism and the performance of their new venture: the more optimistic, the less successful. The tendency for some entrepreneurs to be too confident about their ideas might keep them from planning how to avoid problems that arise.
Anchoring Bias
The anchoring bias is a tendency to fixate on initial information and fail to adequately adjust for subsequent information. As soon as someone states a number, it compromises your ability to ignore that number. When a prospective employer asks how much do you imagine making in this job, your answer typically anchors the employer´s offer. If you suggest an initial salary of 55,000, your boss will consider 50,000 to 60,000 a reasonable range for negotiation. But if you mention 55,650 your boss is more likely to consider 55,000 to 56,000 the range of likely values for negotiation.
Confirmation Bias
More people fear flying than driving in a car. But if flying on a commercial airline really were as dangerous as driving, the equivalent of two 747s filled capacity would crash every week, killing all onboard. Yet the media give much more attention to air accidents, so we tend to overstate the risk of flying and understate the risk of driving. The availability bias is our tendency to base judgments on information readily available. Events that evoke emotions, are particularly vivid, or are more recent tend to be more available in our memory, leading us to overestimate the chances of unlikely events such as an airplane crash.
Escalation of Commitment
Escalation of commitment refers to staying with a decision even when there is clear evidence it is wrong. Individuals escalate commitment to a failing course of action when they view themselves as responsible for failure. They “throw good money after bad” to demonstrate their initial decision wasn't wrong and to avoid admitting they made a mistake. Perhaps they have invested so much time and energy into making their decisions that they have convinced themselves they are taking the right course of action and do not update their knowledge in the face of new information.
Risk Aversion
For many people, a 50-50 flip of coin even for 200 might not be worth as much as a sure promise of 50, even though the gamble is mathematically worth twice as much as the sure thing! This tendency to prefer sure thing over a risky outcome is a risk aversion. Risk averse employees will stick with the established way of doing their jobs, rather than taking a chance of innovative or creative methods.
Hindsight Bias
The hindsight bias is the tendency to believe falsely, after the outcome is known, that we would have accurately predicted it. When we have accurate feedback on the outcome, we seem pretty good at concluding it was obvious. Is is also known as the knew-it-all-along effect, is the inclination, after an event has occurred, to see the event as having been predictable, despite there having been little or no objective basis for predicting it