IMPROVING YOUR JUDGMENT

Professor Jill Klein Melbourne Business School

Why Good Decisions Are Hard

Our brains developed to make hunter-gatherer decisions that enhanced survival. In the modern world this leads to systematic mistakes in decisions, management and leadership.

Hope
Cognitive and social psychologists have worked for years to understand these problems New scientific knowledge allows us to pinpoint our

deficiencies and uncover remedies

Overconfidence Framing Anchoring Confirmation

COGNITIVE BIASES

For each of the following ten items, provide a low and high guess such that you are 90 percent sure the correct answer falls between the two. Your challenge is to be neither too narrow (i.e., overconfident) nor too wide (i.e., under confident). If you successfully meet this challenge you should have 10 percent misses that is, exactly one miss.

90% Confidence Range

Low
1. What is the weight of an empty Airbus A340-600 (in kilograms or tons?)

High

2. In what year did John Steinbeck win the Nobel Prize for literature?
3. What is the distance (in kilometers or miles) from the Earth to the Moon? 4. What is the air distance (in kilometers or miles) from Madrid to Baghdad? 5. In what year was the construction of the Roman Coliseum completed? 6. What is the height (in meters or feet) of the Aswan High Dam? 7. In what year did Magellans crew complete the first naval circumnavigation of the globe? 8. In what year was Mohandas K. Gandhi born? 9. What is the surface area (in square kilometers or miles) of the Mediterranean Sea? 10. What is the gestation period of the great blue whale?
* Winning Decisions, by Russo and Schoemaker (2002)

Overconfidence
Having a greater degree of confidence in ones knowledge, forecasts, etc. than is justified
Thinking you will be correct more often than you

are

Overconfidence: Robust Finding

Study of 2000 managers around the world
Less than 1% got only 1 wrong Most miss 4 7 questions

No strong cross-cultural differences

Overconfidence
Percentage of Misses

Type of People Tested

Harvard MBAs Employees of a Chemical Company Managers of a Computer Company Physicians

Types of Questions Asked

Trivia Facts

Ideal Target
2%

Actually Observed
46%

Chemical Industry Facts

Company-Specific Facts General Business Facts Company-Specific Facts

10%
50% 5% 5% 0-20%

50%
79% 80% 58% 82%

Probability that a Patient has Pneumonia

Overconfidence
82% of people say they are in the top 30% of safe drivers 86% of Harvard Business School MBAs say they are better

looking than their classmates 68% of lawyers in civil cases believe that their side will prevail

Project management
Almost all cost estimates for construction projects

exceed initial estimates by at least 20% (the median is 100%) Overconfident to finish on time

Final Offer Arbitration

70% of bidders believe that their bid will be preferred

by the arbiter

Why Are We So Over Confident?

- Discuss at Tables - Come up with 2-3 reasons

Overconfidence Among Experts

There is no correlation between how confident a person is (or how confident he or she appears to be) and accuracy.

Overconfidence Bias: Remedies

Average judgment of a group is almost

always better than an individual judgment The Wisdom of Crowds Collect other opinions Averaging even 1 other option with yours is an improvement Averaging even your own 2nd opinion with your 1st opinion is an improvement

Overconfidence Bias: Remedies

Think about extremes before the middle Separate deciding from doing
Be a realist when deciding; confine optimism to

implementation

Be contrarian
Ask yourself why might I be wrong?

Dont demand high confidence and narrow intervals from others Try to better calibrate your metaknowledge
Practice and look for feedback Keep a decision-diary

Decision Diary
Date Decision to be Made Decision Process Used Definition of Success Date for Evaluation Evaluation Learnings

Overconfidence Framing Anchoring Confirmation

COGNITIVE BIASES

Framing
A story is told about two monks who were heavy smokers. Concerned that smoking was inconsistent with their commitment to a life of prayer and devotion, they decided to ask their prefect for guidance. The first asked, Father, would it be permitted to smoke while I am praying to the Lord?
The answer was a resounding no.

The second asked, Father, when in moments of weakness I smoke, would it be permitted to say a prayer to the Lord? Yes, the prefect replied, of course!

Framing
Frames draw attention to certain

aspects of a problem, while leaving others in the shadows, hidden from our view
Mindset or mental model: simplifies

our understanding of a complex reality

But can limit our view and the options we consider

You are the CEO of a Fortune 500 company faced with a difficult choice. Due to structural changes in the economy that seem irreversible, one of the divisions of your company is threatened with a partial, and possibly a complete, shutdown. This division currently employs 6000 workers. Your staff has identified two options. Option A entails a partial shutdown and the permanent layoff of some of the workers. Option B entails taking a gamble that will result in either 0 or 6000 jobs. Specifically, the two options are as follows:
A: 86% B: 14%
Facing gains, so risk averse

Version 1 Option A : exactly 2000 jobs saved. Option B : 1/3 probability 6000 jobs saved and a 2/3 probability 0f no jobs saved.

Version 2 Option A : exactly 4000 jobs lost. Option B : 1/3 probability 0f no jobs lost and a 2/3 probability 6000 jobs lost.

A: 55% B: 45%
Facing losses, so risk seeking

Tested all over the world similar results

Examples of Framing: Dan Ariely

Frame Dependence Remedies: Awareness

What issues does the frame address most?
What boundaries do I put on the problem? In particular, what aspects of the situation do I leave out of consideration? What yardsticks and reference points do I use to measure success? What metaphors, if any, do I use in thinking about this issue? (football, war, family) Why do I think about this question this way? What training or experiences frame the way I view the world? What does the frame emphasize or minimize? Do other people in my profession or industry think abut this problem differently? How? Why? Are their frames successful?
* Winning Decisions, by Russo and Schoemaker (2002)

Frame Dependence Remedies: Falsify Frame

Try to falsify your frame
A sale is a transaction A sale is part of relationship management

A negotiation is win or lose

A negotiation can be win-win

Role play devils advocate

Frame Dependence Remedies: Find or Build Better Frames

Talk to someone with different training or

background or from a different industry

Ask How do you see it? What am I

overlooking? Pharma moving to OTC brought in people from P&G

Talk to other stakeholders (suppliers,

customers)

What frames affect decisions where you work? What remedies could you use?

Overconfidence Framing Anchoring Confirmation

COGNITIVE BIASES

 An initial starting point has an

undue influence on our judgment

Anchoring Bias
Mean: 2018 m 2.0billion

Version 1
What is your best guess of the annual Australian egg production (in millions)? ____________

Euro/USD exchange above or below .6

.68

Euro/USD exchange above or below 1.6 Mean: 41.2 billion Version 2 What is your best guess of the annual Australian egg production (in billions)? ____________
1.5

Actual production:

2.44 Billion

What units do you do your budgeting in?

Anchored to a Random Number

Anchoring Bias
Often observed in
Project Completion Time Estimates
Sale Estimates Budgeting Resourcing projects

Anchoring Bias: Remedies

Be aware of the anchor you may be using
Try multiple anchors
Most recent similar project completion time Average of last 10 projects An optimistic forecast (nothing goes wrong) A pessimistic forecast (everything goes wrong)

How might anchors affect the valuation decisions that you make at work?

Overconfidence Framing Anchoring Confirmation

COGNITIVE BIASES

Confirmatory Bias: Confirming Expectations

Grade Level

Rich Hannah Poor Hannah

Confirmation bias
Preference for information that is

consistent with beliefs rather than information that goes against beliefs
More likely to draw conclusions that suggest

Positive outcomes
Support for pre-existing beliefs

Confirm status and success

Also referred to as motivated reasoning

Remedies
Similar to overconfidence remedies Generate alternative hypotheses

Look for both confirming and disconfirming evidence At least temporarily, pretend others are right (even if you dont think they are)

Further Reading