ENGIN 270 A Organizational Behavior Negotiation for Engineers Session Decision Making Elli Kass Ph D Agenda What makes real world decisions so hard How decision making relates with leadership Key decision making theories Heuristics biases as barriers and tools Understand predictable distortions in decision making and judgement Help us to predict when we may use them with consequences to avoid them Understand others behavior including nudging them Why people inappropriately keep investing in losing courses of action including projects Escalation of commitment Carter Racing The Clock is Ticking Not in everyone chat but as a private chat message did you choose to race or not race and a few words as to why 35 minutes to reach decision Carter Racing Was this easy or hard Why Did it remind you of any real life situations How A Most Unusual Auction This is a REAL Auction When we begin bids start at 0 50 and every subsequent bid is at least 0 50 more than previous bid We will use chat to make bids If there is a tie we will only count the first person in chat with the given number If you communicate with anyone this is a form of bidding We will assume you want to bid 50 more than the current winning bid A Most Unusual Auction This is a REAL Auction When we begin bids start at 0 50 and every subsequent bid is at least 0 50 more than previous bid We will use chat to make bids If there is a tie we will only count the first person in chat with the given number The highest bidder will pay their bid and receive the item The second highest bidder will pay their 2nd place bid and get nothing Would You Rather Choice A Sure win of 500 Choice B 50 chance of winning 1000 50 chance of winning 0 Classical Rational Economic Model Identify the problem Identify the decision criteria weight them Identify list alternatives Identify consequences of each alternative Consider your preferences weight alts Choose the best satisfaction maximizing option Would You Rather Choice A Sure loss of 500 Choice B 50 chance of losing 1000 50 chance of losing 0 The Fantasy The Reality The capacity of human mind for formulating and solving complex problems is very small compared with the size of the problems whose solution is required for objectively rational behavior in the real world Herbert Simon Two Decision Making Systems System 1 Affective system Fast Unconscious Effortless Associative relies on shortcuts heuristics System 2 Analytic system Slow Conscious deliberate Effortful and exhausting Logical Heuristics and Biases A heuristic is a strategy that ignores part of the information with the goal of making decisions more quickly frugally and or accurately than more complex methods Gigerenzer Gaissmaier 2011 180 Biases So complicated it undermines usefulness Framing Effect When faced with a choice between a certain outcome and an uncertain gamble those who are positively framed tend to be risk averse while those who are negatively framed tend to be risk taking Positive and Negative Framing If program A is adopted 2000 jobs will be saved 72 If program B is adopted there is 1 3 probability that 6000 jobs will be saved and 2 3 probability that no jobs will be saved 28 If program A is adopted 4000 jobs will be lost 22 If program B is adopted there is 1 3 probability that no jobs will be lost and 2 3 probability that 6000 jobs will be lost 78 Key Decision Making Biases NAME OF BIAS Anchoring and Adjustment DESCRIPTION The tendency to rely too heavily or anchor on one trait or piece of information when making decisions even when the anchor might be unreliable or irrelevant Even when we adjust away from the anchor we don t adjust very far and stay too close to the anchor Framing Availability The tendency to make different decisions based on how a question or situation is phrased Positive Negative Framing The faced with a choice between a certain outcome and a gamble we tend to be risk averse when positively framed and risk seeking when negatively framed We assume that easily imaginable events are more likely to happen and to be true Availability in our imagination is enhanced by repetition experienced emotions and closeness Sunk Cost Effect We don t let go of sunk costs Availability Heuristic Which of the following kills more people in the USA this past year Stomach cancer or motor vehicle accidents It is claimed that when a particular analyst predicts the market will rise it always rises You are to assess this claim Below are 4 cards Each one has the prediction on one side and the outcome that obtained on the other Which cards do you need to turn over to test the hypothesis Card 1 Prediction Market will rise Card 2 Prediction Market will fall Card 3 Outcome Market rises Card 4 Outcome Market falls Key Decision Making Biases NAME OF BIAS Confirmation bias DESCRIPTION Tendency to look for evidence to support what we believe or hope to be true Overconfidence Illusion of control Tendency to overestimate be overly optimistic regarding the likelihood of positive events for ourselves our standing on positive characteristics Escalation of Commitment Inappropriately investing in a losing course of action Red Flags You made a previous decision to commit resources money time effort to a task The situation didn t pay off as expected You re tempted to invest commit more resources Remedies Set limits for the losses you re willing to accept beforehand Create decision points beforehand that allow you to exit a course of action Realize that smart people can make bad choices Create an atmosphere of trust and open communication Don t punish risk taking Psychological Safety Imagine what you would do if it were a new project Have others critically review the project history Have different people make the initial decision and make the decision to continue or quit Let Sunk Costs Go look for framing effects