Common Biases and Errors in Decision-Making Process
COMMON BIASES AND ERRORS IN DECISION-MAKING PROCESS
In addition to engaging in bounded rationality, an accumulating body of research tells us that decision makers allow systematic biases and errors to creep into their judgments. These come out of attempts to shortcut the decision process. To minimize effort and avoid difficult trade-offs, people tend to rely too heavily 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 highlights the most common distortions.
Overconfidence Bias: It’s been said that “no problem in judgment and decision making is more prevalent and more potentially catastrophic than overconfidence.�
When we’re given factual questions and asked to judge the probability that our answers are correct, we tend to be far too optimistic. For instance, studies have found that, when people say they’re 65 to 70% confident that they’re right, they were actually correct only about 50% of the time. And when they say they’re 100% sure, they tended to be 70 to 85% correct.
From an organizational standpoint, one of the more interesting findings related to overconfidence is that those individuals whose intellectual and interpersonal abilities are weakest are most likely to overestimate their performance and ability. So as mangers and employees become more knowledgeable about an issue, the less likely they are to display overconfidence. Overconfidence is most likely to surface when organizational members are considering issues or problems that are outside their area of expertise.
Anchoring Bias: The anchoring bias is a tendency to fixate on initial information as a starting point. 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
In addition to engaging in bounded rationality, an accumulating body of research tells us that decision makers allow systematic biases and errors to creep into their judgments. These come out of attempts to shortcut the decision process. To minimize effort and avoid difficult trade-offs, people tend to rely too heavily 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 highlights the most common distortions.
Overconfidence Bias: It’s been said that “no problem in judgment and decision making is more prevalent and more potentially catastrophic than overconfidence.�
When we’re given factual questions and asked to judge the probability that our answers are correct, we tend to be far too optimistic. For instance, studies have found that, when people say they’re 65 to 70% confident that they’re right, they were actually correct only about 50% of the time. And when they say they’re 100% sure, they tended to be 70 to 85% correct.
From an organizational standpoint, one of the more interesting findings related to overconfidence is that those individuals whose intellectual and interpersonal abilities are weakest are most likely to overestimate their performance and ability. So as mangers and employees become more knowledgeable about an issue, the less likely they are to display overconfidence. Overconfidence is most likely to surface when organizational members are considering issues or problems that are outside their area of expertise.
Anchoring Bias: The anchoring bias is a tendency to fixate on initial information as a starting point. 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