Errors in Decision Making

Lecture 3

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The Decision Problem

• There was a drug that suppressed abnormal heart beat and when you gave the drug to a patient with heart attack, the abnormal heart beat settled down.

– So, it is a logical decision to give everybody who comes into a hospital with a heart attack this drug to make sure they wouldn't run into any problems with an abnormal heart beat.

• However, scientists conducted randomised trials using and not using the drug and they found the drug was not effective and it had cost and side effects, notably a number of occasions when people died.

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• An extension of abnormal heart beat is the case of heart failure where there is a number of drugs with excellent therapeutic affects that make the heart pump better, but when most of these drugs were tested in randomised trials they turned out to be killing people.

– In fact, those anti-arrhythmic drugs are killing thousands of people each year.

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• Just as tragically, there are many examples of treatments which have been proven to work but doctors are not using.

– So, there must be problem with the type of approach to decision making that is common practice.

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• It would appear that the common, logical approach that doctors use goes like this - a patient's symptoms are a result of a biological problem.

– So, if the biology is corrected, but therapy, operation or drugs, the symptoms should go away - problem fixed.

• It's logical and it sounds reasonable but often it just doesn't hold up. Worse it's not obvious to doctors that this logic doesn't work.

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• For example: there are hundreds of thousands of operations being done in the United States for osteoarthritis of the knee.

– The surgeons had an excellent rationale that they would wash out the undesirable substances from the knee, take out little pieces of debris that might be floating around in the knee and this would help people with osteoarthritis.

• And when patients came back they said well I do seem to be feeling better.

• When tested in a randomised trial, there was absolutely no impact of this treatment.

• It was compelling biologic rationale. The trouble is with that kind of logic, many times it works out but many other times it does not.

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• So if doctors rely on predictions based on biology to guide treatment decisions sometimes they are going to be badly wrong.

– But that's exactly the way doctors and other health professionals are taught to think, to reason from biological principles.

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• We can surmise then that some patients benefit from a treatment that kills other people.

– Hence it is reasonable to assume that small changes in initial conditions have a dramatic effect on the final outcome.

• Further then, since we are often forced to make decisions under such conditions what tools do we have available to us?

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• The process of arriving at decisions in response to identified problems follows a fairly predictable path.

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• A problem can be generalised as an ill-defined situation and the existence of this situation is “discovered” through the generation of one or more cues.

– The person sensing these cues then looks for some type if observable pattern in the information and compares this pattern to previously used patterns, or analogues, for which there has been previous solutions.

• This typical decision approach is influenced by three important cognitive processes, each of which dramatically affects the delivery of an optimum solution to the situation.

• These processes involve instinct, intuition and insight.

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The 3 “I’s”: Instinct, Intuition and Insight

• Most of the time, when an issue arises we use mental tools for making decisions that rely on cognitive processes that are deeply embedded in our brains.

– Their application will depend on how structured the issue is and how complex our judgment has to be to make a good decision.

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Cognitive Errors

• At any given time our brain has a limited capacity to process, deal with and interpret information.

– So although our ability to add to the knowledge stored in memory and other mental systems seems unlimited, there appear to be fairly strict limits on how much information we can handle at once.

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• This is due to the fact that working memory-the short-term system can hold only a limited amount of information at any time.

– Since this system seems to be the contact point between what we are thinking about right now and information stored in memory, its limitations create a bottleneck in our efforts to make sense of our experience and to create something new.

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• A result of the limited capacity to process information, is that we often adopt mental shortcuts, or tactics for stretching our limited capacity as far as possible.

– These tactics are helpful from the point of view of conserving precious mental capacity, but can also lead us into serious errors.

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• Our tendency to rely on mental shortcuts is strongest at times when we are stressed and have to make important decisions quickly or on the basis of incomplete information.

– This process leads to errors of judgement.

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• Many kinds of errors exist, but among the most common is our tendency to rely on simple rules for making complex decisions in a rapid and relatively effortless manner.

– Perhaps the most important is the “availability simple rule”.

• This mental rule suggests that the easier it is to bring information to mind, the more important or accurate we perceive it to be, and hence the greater its impact on our subsequent judgments or decisions. Further, the more information we can bring to mind, the greater the importance we assign to it?

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• Although this simple rule seems reasonable, it can lead to important errors, primarily because dramatic or unusual information is easier to recall than more mundane information.

– Thus, it may influence our thinking and our decisions to a greater extent than is justified.

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• For instance, imagine a manager who is hiring a new employee.

– Among the several possibilities, one is much more expressive and outgoing than the others.

• Later, when trying to remember the interviews, the manager finds it easier to recall what this person said, which may tip the decision in their favour, even though other applicants may be better qualified.

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• In addition to simple rule, many other potential errors in our thinking result from the same general tendency to conserve our limited processing capacity.

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• Three are especially common-and dangerous:

– Optimistic bias

– Confirmation bias

– The illusion of control.

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– Optimistic bias is to the tendency to expect things to turn out positively even when a person has no rational basis for such expectations.

• One common form of the optimistic bias is known as the planning fallacy, or the tendency to believe that we can complete more in a given period of time than we actually can.

– You have probably observed this tendency in your own thinking.

– Unless you are unusual you probably underestimate how long it will take you to complete various tasks, and also overestimate the amount you can get done in a given period of time.

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• Even though the optimistic bias is dangerous, in a sense, confirmation bias can be even worse.

– This is the tendency to notice, process, and remember information that confirms our current beliefs much more readily than information that disconfirms our current beliefs.

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– All too often, we use a “lens” where the only information that gets through is information that strengthens our current views.

• Clearly, this error can be a serious one when we cannot afford to ignore information contrary to their current beliefs.

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• The illusion of control refers to the tendency to assume that our fate is under our control to a greater extent than is actually the case:

– To believe that we have more control over what happens to us than rational considerations suggest.

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• Research findings indicate that managers believe that the fate of their organisation is largely under their control, and so underestimate the potential impact of economic conditions, competitors, and many other factors that are, in fact, largely outside their influence.

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• Because we must deal with the basic dilemma of a limited capacity to process information in the face of large amounts of input, we may adopt irrational behaviour.

– We begin to apply to a wide range of tilts and biases that do indeed save effort, but also increase the odds of serious errors.

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ErrorsError Description Example

Representative simple rule

A mental rule-of-thumb suggesting that the more closely an event or object resembles typical examples of some concept or category, the more likely it is to belong to that concept or category

An individual is assumed to belong to some occupation or group because she or he resembles the stereotype for that group or occupation

Availability simple rule

A mental rule-of-thumb in which the importance or probability of various events is judged on the basis of how readily information concerning the event can be brought to mind, or how much information can be readily recalled

People assume that the chances of dying in a fire or airplane crash are greater than those of dying in an automobile accident because the media report fatal fires and airplane crashes more dramatically than automobile accidents thus making them easier to remember

Anchoring-and -adjustment simple rule

A cognitive rule-of-thumb in which existing information is accepted as a reference point but then adjusted to take account of various factors

Negotiators accept their opponent's opening offer as a framework for further bargaining

Confirmation bias The tendency to notice and remember information that confirms our views

Managers become increasingly convinced that an idea for an new approach is viable because they notice and remember only information that supports this view

Optimistic bias The tendency to assume that things will turn out well even without any rational basis for this prediction

A manager believes that the odds they will succeed are much higher than they actually are

Planning fallacy The tendency to assume that we can accomplish more in a given period of time than is true (or to underestimate the amount of time it will take to complete a project)

A manager assumes that each stage in starting something new will take less time to complete than is actually true

Escalation of commitment

The tendency to stick with decisions that yield negative results even as the negative results continue to mount

A manager continues to make decisions in a specific way even though these efforts produce a mounting string of failures

Affect infusion Emotions have powerful effects on thinking (e.g., when in a good mood we notice and remember positive information; when in a bad mood, we notice and remember negative information)

A manager who is in a bad mood when interviewing a job applicant recalls mainly negative information about this person; in contrast, the manager recalls mainly positive information about an applicant interviewed while in a good mood

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Case Discussion: To much Invested to Quit

• Have you ever heard the phrase "Throwing good money after bad"?

– It refers to the fact that in many situations, people who have made a bad decision

• A decision that is yielding negative outcomes, tend to stick to it even as the evidence for its failure mounts.

• They may even commit additional time, effort, and resources to a failing course of action in the hope of somehow turning it around.

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• This tendency to become trapped in bad decisions is known as escalation of commitment, and is very common.

– It happens to investors who continue to hold stocks that fall sharply, and to people in troubled relationships, who often remain in them when all their friends urge them to withdraw.

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• Escalation of commitment also happens in decision-making groups.

– They, too, find it difficult to admit that they made a mistake, and so cling to bad decisions that generate increasingly negative results.

• Research findings indicate that such effects sometimes described as collective entrapment (a group becomes trapped in a bad decision) are especially likely to occur in cases where groups have exerted a lot of effort to make the initial decision and so feel strongly committed to it.

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• Why do such effects occur?

• Why do people tend to stick to decisions even if they are producing negative results?

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• Well there are many possible reasons.

1. Sticking with a decision is, initially, quite rational.

• Giving up too quickly can be a mistake, and if the decision was made carefully to start with, it makes sense to continue with it, at least for a while.

• As losses mount, though, other processes that are not so rational come into play.

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2. People are unwilling to admit that they made a mistake because doing so will cause them to lose face and look foolish.

3. Those who made the initial decision want to justify their actions, and the best way to do so is to continue on the present course and somehow make it turn out well.

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• Whatever the precise basis for escalation of commitment, it poses a real danger to management because new approaches simply cannot afford to stick with poor strategies or business models.

– For example, consider StorageNetworks, a company that in the late 1990s had a market value in the billions, but was forced to liquidate just a few years later.

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• StorageNetworks started with what seemed to be a promising idea:

– It would provide storage of data to large companies, thus saving them the expense of buying expensive storage facilities themselves. The founders stuck to this idea and at first it seemed to work well.

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• But soon, serious flaws in this business model appeared.

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• As more and more stories of "data-pirating" appeared in the media, many customers became nervous about turning over confidential data to StorageNetworks.

– They preferred to hold their own data and to hire their own security specialists to protect it.

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• Second, as technology advanced, the costs of storing data in-house dropped sharply, thus making StorageNetworks' services superfluous.

– Despite these facts, though, the senior management of StorageNetworks stuck to their original ideas and ultimately, paid the full price for doing so:

• The company failed, taking their profits, resources, and dreams down with it.

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• This and many other instances of senior managers who stick to initial decisions despite mounting evidence that they are bad ones, indicate that escalation of commitment is definitely a serious cognitive error, one with potentially devastating consequences.

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• What can be done to minimize the risk of this kind of error?

– Several steps are useful. • One involves deciding, in advance, that if losses reach

certain limits, or negative results continue for a specific period of time, no further resources will be invested and the decision will be changed.

• This step is hard to take, but it is similar to "stop loss" orders in the stock market: It does limit the losses that will be sustained.

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• Another strategy involves assigning to individuals other than the ones who made the original decision the task of deciding whether to continue.

– Because they did not make the original commitment, they are often less committed to it.

• You don’t send thems’ that created the problem to fix it!

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• A third approach involves creating a culture in which people do not feel that they will lose face if they reverse earlier decisions now found to be poor ones.

– Rationally, this approach makes a lot of sense but it can be difficult to implement.

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• Overall, it is clear that escalation of commitment and collective entrapment in bad decisions represent serious threats to the success of productive decisions.

– For this reason, we should be fully aware of these potential pitfalls and take active steps to avoid them.

• Doing so can be a challenging task, but one well worth the effort: the company we save may be our own!