11.1 Faulty Decision Making

No matter which model you use, it is important to know and avoid the decision making traps that exist. Daniel Kahnemann (another Nobel Prize winner) and Amos Tversky spent decades studying how people make decisions. They found that individuals are influenced by overconfidence bias, hindsight bias, anchoring bias, framing bias, and escalation of commitment.

Overconfidence Bias

Overconfidence bias occurs when individuals overestimate their ability to predict future events. Many people exhibit signs of overconfidence. For example, 82% of the drivers surveyed feel they are in the top 30% of safe drivers, 86% of students at the Harvard Business School say they are better looking than their peers, and doctors consistently overestimate their ability to detect problems (Tilson, 2016). Much like friends who are 100% sure they can pick the winners of this week’s football games despite evidence to the contrary, these individuals are suffering from overconfidence bias. To avoid this bias, take the time to stop and ask yourself if you are being realistic in your judgments.

Anchoring

Refers to the tendency for individuals to rely too heavily on a single piece of information. Job seekers often fall into this trap by focusing on a desired salary while ignoring other aspects of the job offer, such as additional benefits, fit with the job, and working environment. This mode of thinking can result in a less-than-desirable work environment and your perception of the job itself.

Framing Bias

Framing bias is another concern for decision makers. Framing bias 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 find it easier to let go of a discount as opposed to accepting a surcharge, even though they both might cost the person the same amount of money. Similarly, when members read the menu in the clubhouse tend to prefer a statement such as “85%  beef” as opposed to “15% fat” (Li, Sun & Wang, 2007). It is important to be aware of this tendency because, depending on how a problem is presented to us, we might choose an alternative that is disadvantageous simply because of the way it is framed.

Escalation

Escalation of commitment occurs when individuals continue on a failing course of action after information reveals it may be a poor path to follow. It is sometimes called the “sunken costs fallacy,” because continuation is often based on the idea that one has already invested in the course of action. For example, imagine a superintendent who purchases a used greens mower, which turns out to need something repaired every few weeks. An effective way of dealing with this situation might be to sell the mower without incurring further losses, donate the mower, or use it until it falls apart. However, many people would spend hours of their time and hundreds, even thousands of dollars, repairing the mower in the hopes that they might recover their initial investment. Thus, rather than cutting their losses, they waste time and energy while trying to justify their purchase of the mower.

Why does escalation of commitment occur? There may be many reasons, but two are particularly important. First, decision makers may not want to admit that they were wrong. This may be because of personal pride or being afraid of the consequences of such an admission. Second, decision makers may incorrectly believe that spending more time and energy might somehow help them recover their losses. Effective decision makers avoid escalation of commitment by distinguishing between when persistence may actually pay off versus when it might mean escalation of commitment. To avoid the escalation of commitment, you might consider having strict turning back points.  Finally, creating an organizational climate in which individuals do not fear admitting that their initial decision no longer makes economic sense would go a long way in preventing the escalation of commitment, as it could lower the regret the decision maker may experience (Wong & Kwong, 2007).

So far, we have focused on how individuals make decisions and how to avoid decision traps. Next, we shift our focus to the group level. There are many similarities as well as many differences between individual and group decision making. There are many factors that influence group dynamics and also affect the group decision making process. We will discuss some of them in the following section.