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SESSION 2
DECISION-MAKING BIASES
**I would strongly recommend reading session 2 slides in details since its
pretty content heavy. Click here to read.
Heuristics are described as "judgmental shortcuts that generally get us where we
need to go and quickly but at the cost of occasionally sending us off course."
But the above model fails when there is lack of a) cognitive ability or b)
sufficient information and c) its expensive or efficient to hunt for facts and
figures.
Then people rely on bounded rationality which is based on figuring out the
acceptable alternative (satisfy and suffice the key criteria) rather than the
most optimal one.
2 modes of thinking
Automatic system : Instinctive reactions, subconscious decision-making
e.g. Humans
Reflective system : weigh multiple options, predict all the consequences of
each, and choose rationally e.g. Home economicus, 4-pointers :P
Sources of error in decision making
Cognitive heuristics & biases
1.Availability bias : Based on ease of recall, presumed associations
Number of deaths due to Alzheimers disease was more than death due to
homicide but since the latter gets reported more we think otherwise.
2. Representative bias : We depend on our mental representations based on
past experience.
Insensitivity to base rates : Simply put we dont think in percentages or
ratios, we think in absolute numbers ignoring the base/denominator. E.g. I
get 5 out of 20 and you get 5 out of 100, logically speaking I am the better
performer but apparently our brains are too stupid to register this quickly
Insensitivity to sample size : Most brains forget that the smaller the
sample, the larger is the probability of deviation from mean happening. (But I
expect ISB brains infused with Stats course to remember this.)
Misconceptions of chance : We think if something has occurred more
number of times earlier, its less likely to offer in future.
Regression to the mean : Often exceptional performances are followed by
more normal performances, so the change in performance is explained by
regression towards the mean but we often tend to associate a cause with it. It
simply might be that the person ran out of luck the 2 nd time.
Two types of escalation of commitment Unilateral ( Once you invest in a project you will continue even if logic says
its likely to fail)
Competitive (remember how Mike & Amit Bagla eventually got ready to pay
more than 500 to get the 500 rupee? :P the war of discounts between the
start-ups)
The way to get over the bias is - Set minimum targets for performance
Have different individuals assess initial and subsequent decisions about a
project Attain more frequent feedback about project completion and costs
Reduce penalties or risk for failure Make costs of persistence explicit
Confirmation Bias : Confirmation bias is a phenomenon wherein decision
makers have been shown to actively seek out and assign more weight to
evidence that confirms their hypothesis, and ignore or underweigh evidence
that could challenge their hypothesis.
Hindsight Bias : After an event occurs, we feel we already knew what was
going to happen even though there was no strong evidence to suggest so.
This makes us attach less value to the person who brings in new information
about what actually happened.
E.g. a manager might pretend to be a know-it-all and simple yawn and say I
knew it already when an employee brings in a forecast after much hard
work based on facts and figures.
Positive (Ego-centric) Illusions : We view ourselves, the world, and the
future in a considerably more positive light than is objectively likely or than
reality can sustain.
E.g. we many a times tend to consider ourselves as Gods gift to earth and
think we cant be wrong. We tend to blame everything else if we fail or make
a mistake (the questions were out of syllabus, the interviewer was biased, oh
I was drunk and it happened bla bla :P :P )
Emotion-related biases/Priming:
Our rational brain has the ability to capture only 7 new information at a time(
remember the monkey video?)
Hence under stress we start relying on factors other than immediately
available data or logical analysis.
Intuitive thinking: It means getting an idea or understanding, without being
able to explain how you have developed it.
When is right to rely on intuition?
Positive illusions :
Seek outside-alternate (non-ego) view points
Seek disconfirming evidence
SESSION 3
INFLUENCE AND PERSUASION
3 general principles behind framing strategies
a. Leveraging attention
People usually respond to/rely on
Heuristic cues of trustworthiness
Authority
Who we like (this is based on similarity, physical attractiveness,
flattery)
b. Leveraging framing of information
People usually respond to/rely on
Anchoring and adjustment heuristic
Representativeness heuristic
Availability heuristic --- Salience, Contrast and decoy effects,
c. Leveraging motivation
People usually respond to/rely on