why our decision making isn’t as

Why our decision making isn’t as good as we think it is

And what we can do about it

Understanding Cognitive Biases

2019 Business & Workplace Convention ı May 9 - 11 ı Moon Palace Resort And Spa

Objectives

• To learn about Cognitive Biases

• To recognize how they negatively effect decision making

• To identify what to do to overcome them

• To become better decision makers

Cognitive Biases

• Building upon Daniel Kahneman’s work

• 2002 Nobel Prize in economics

• Thinking, Fast and Slow (2011)

Daniel Kahneman

http://www.princeton.edu/pr/pictures/g-k/kahneman/kahneman-MED.jpg

http://www.youtube.com/watch?v=l4zSc2lYl60

http://www.youtube.com/watch?v=l4zSc2lYl60

System 1 and System 2 Thinking

• System 1 Thinking – our Automatic responses

• System 2 Thinking – our Reflective or Analyzing responses

• We often use System 1 when System 2 would get better results

• But System 2 is lazy and typically endorses what System 1 suggests

Quickly answer

1. A bat and ball cost $1.10

2. The bat costs one dollar more than the ball.

How much does the ball cost?

Ball costs .05 Bat costs 1.05

• Many of us say .10 and are using System 1

• But System 2 is often better (More Effective)

• Cognitive Biases work in a similar way

• We fail to take the time to analyze

Cognitive Biases

– Remember – System 2 is lazy

– We use shortcuts (heuristics or cognitive biases) to speed up our decision making

– The result – we make systematic errors when we process information

Confidence in our Decisions

• The confidence we have in a story is determined by how much sense it makes – not the quality of the data

• If it is makes sense we believe it

• System 1 generates the most reasonable story possible

• Usual result: We’re confident we’re right

• But our stories often have very little information

• None-the-less the story is good – we believe it

• System 2 believes it

System 1 and System 2 Thinkingand being Overconfident and too

Optimistic

Majority of businesses fail – But 90% to 100% of those starting a business believe their business will be successful

When getting married, few believe their marriage will end in divorce

Would more System 2 thinking be helpful?

Overconfidence - Optimists

• Optimists tend to be confident

• Optimists take on risky projects because they are overly optimistic about the odds (litigation, business start-ups)

http://www.aajkikhabar.com/en/uploads/images/300x300/52864.jpg

Overconfidence - Optimists In many ways it’s good to be an Optimist

Optimists • Live longer

• Buy individual stocks

• Take more risk

• More likely to remarry after divorce

• Work longer hours

• More optimistic about future income

• More resilient

http://www.aajkikhabar.com/en/uploads/images/300x300/52864.jpg

Being Optimistic and Confident helps –But relying on System 1 Thinking may lead to overconfidence. What are the

drawbacks?

http://vnaveen.files.wordpress.com/2008/02/what-matters-most-is-how-you-see-yourself_1.jpg

Overconfidence

• Confidence in one’s beliefs depends mostly on the quality of the story one can tell oneself

• What we tell ourselves is often based upon what we see - even if we see little

Overconfidence

• Often we fail to allow for the possibility that the evidence that should be critical to our judgment may be missing

• We assume that:

• What You See Is All There Is (WYSIATI)

Overconfidence and Intuition

• We all use our intuition to make decisions

• Sometimes we’re right• Sometimes we’re not• Know under what conditions your

intuition is likely to be correct• What are they?

Overconfidence – Intuition

• Accuracy of intuitive judgments increase when 2 conditions exist:1. Environment is sufficiently regular to

be predictive2. There is an opportunity to learn

these regularities through prolonged practice (implicit is that they are obtaining feedback and using it)

Overconfidence – Intuition

1. Environment is predictive

2. Opportunity to learn through prolonged practice

– Chess masters, fire chiefs, nurses, MDs, and athletes have opportunities to learn through practice in predictable settings

Overconfidence – What Happens

• We fail to consider the other’s point of view

• We see things only from our own perspective

• We’re unaware and uninterested in other’s understanding of the situation

• One fails to obtain information that would provide a better understanding

• (WYSIATI)

Take-home points - Overconfidence

• Not seeking out more information may be easier and more comfortable

• When making important decisions realize key information may be missing (WYSIATI)

• Ask others what additional information could be obtained that might influence the quality of the decision to be made

• Do analyses based upon base rates and valid data• Test out decisions, possibly using scenarios

Base Rates - Librarian or Farmer?

• “Steve is very shy and withdrawn, always helpful but with little interest in people or in the world of reality. A meek and tidy soul, he has a need for order and structure and a passion for detail.”

• Is Steve more likely a:

__ Librarian

__ Farmer


• Most would say that Steve’s personality resembles that of a stereotypical librarian

• But ignore an equally relevant statistical fact:

– There are 20 times as many male farmers as there are male librarians!


• Because of this, it is almost certain that more male “meek and tidy souls” will be found on tractors than at library information desks

• We tend to ignore relevant statistics and use resemblance as a simplifying rule of thumb or shortcut to make a difficult judgment

• Consider the base rate when making decisions

Base Rates - Categories and Decisions

Linda is 31, single, outspoken and very bright. She majored in philosophy. As a student, she was deeply concerned with issues of discrimination and social justice and also participated in environmental protection demonstrations.

Which alternative is more probable?a __ Linda is a bank tellerb __ Linda is a bank teller and is active in the

feminist movement

Base Rates - Categories and Decisions

• Remember…

– b is a subset of a

– There are more bank tellers than bank tellers who are active in the feminist movement

Take away point - Base Rates

– Do not forget about base rates when making decisions!

– Remember

– What you see is NOT all there is

– WYSIATI – NO!

Availability of Information

• Information that’s easily retrieved from memory is more influential

• The greater the available the more we believe an event occurs

• Media and personal experiences are major sources of information:

Availability of Information – Is it really safe to fly?

Ethiopian Air Crash – Boeing 737s Max Grounded

Availability of Information – Is it really safe to fly?


Air Travel is Safer than Cars per Mile Traveled


• More people are afraid of flying than driving

• More people buy earthquake (and flood) insurance shortly after an earthquake (or a flood)

• Information that is Available influences how often we believe something happens and our behavior

Take Away Points Availability of Information

• Recognize that you are being influenced by the availability of information (often by the media)

• Seek out data, including base rates to determine frequency of events

Confirmation Bias

• We seek out information that confirms our beliefs

• We tend to talk with and listen to those who share our views

• In the USA Republicans watch Fox and

• Democrats watch MSNBC

• We are more comfortable with views that are consistent with our own

• We fail to search for information that is different from our preconceived perspectives

Take away points - Confirmation Bias

• Recognize that others may have valid information that you don’t

• Seek out information that contradicts your views

Anchoring

• Anchoring happens when a number is presented

• Opening offers act as anchors • We may make adjustments from that anchor• But often those adjustment are inadequate• That initial offer or number is the base upon

which we make future decisions • It “anchors” our thinking, usually without our

realizing it

Anchoring

• A supermarket ran a 10% off sale on Campbell’s soup:– On days they posted a restriction of 12

cans per customer, an average of 7 cans were bought per purchaser

– On days that there was no restriction posted about half as many cans were bought per purchaser

– 12 served as an anchor, increasing sales– How can knowing this help you?

Anchoring

• At some restaurants and taxis when you get the bill it shows how much a 15%, 18% and 20% tip is.

• How has this influenced you –or has it?

Anchoring

Environmental conscious participants were asked how much of an annual contribution they would make:

– “to save 50,000 offshore Pacific Coast seabirds from small offshore oil spills, until ways are found to prevent spills or require tanker owners to pay the operation.”

Anchoring

• Before asking this question some were asked “would you be willing to pay $5

• Others were asked if they’d pay $400• Others were not given a figure (no anchor)• On Average:

– Those asked for $5 would give $20– Those not given an anchor said $64– Those given an anchor of $400 said $143– How can knowing this help you?

Take away points - Anchoring

• Know that if a number has been presented (and especially if the stakes are high) recognize it and mobilize yourself to combat the effect

• That is – try to not let it influence you

• If negotiating - be prepared

Status Quo Bias or Default Option Bias

(Indirectly related to Anchoring)

• Maintaining the current situation – Whether desired or not

• Not canceling subscriptions– Low price plans for limited times get extended– No fee for first year credit cards get renewed

• Not changing beneficiaries• Default option-donor organ default on drivers licenses

• What are you take away points?

Framing

Framing: Different ways of presenting information evoke different responses

Framing (and What You See Is All There Is - WYSIATI)

“The odds of survival 1 month

after surgery are 90%.”

Would you take the surgery to correct a problem that is causing a negative impact on your quality of life?

__ Yes __ No


“The odds of dying 1 month within surgery are 10%.”


__ Yes __ No


“The odds of survival 1 month

after surgery are 90%.”


_15_ Yes _7_ No


“The odds of dying 1 month within surgery are 10%.”


_5_ Yes _17_ No


• Equivalent is apparent, but we normally only see one formulation – WYSIATI

• Would you have accepted the surgery with a 10% mortality rate?

Framing and Risk– Framing is we how

conceptualize situations

– Frames influence perceptions, decisions and actions

– Frames also lead people to:• Seek

• Avoid or be

• Neutral about their risk taking

Framing

Would you rather have:

___ $10,000 for sure, or

___ Take a 50-50 chance of winning $20,000 or winning nothing

(Opportunity for Gain - Approach-Approach; 2 attractive choices)

Framing

Would you rather lose:

___ $10,000, or

___ Take a 50-50 chance of losing $20,000 or losing nothing

(Potential for Loss - Avoidance-Avoidance ; 2 unattractive choices)

Framing

Would you rather have:

_20__ $10,000 for sure, or

__3_ Take a 50-50 chance of winning $20,000 or winning nothing

(Opportunity for Gain - Approach-Approach; 2 attractive choices)

Framing

Would you rather lose:

__4_ $10,000, or

_18__ Take a 50-50 chance of losing $20,000 or losing nothing

(Potential for Loss - Avoidance-Avoidance ; 2 unattractive choices)

Framing – Risk Aversive -Gains

• We tend to avoid making risky decisions when an issue is framed as a gain (we’re risk aversive, more conservative)

• Most people will select to take $10,000 for sure, rather than take a 50-50 chance of winning $20,000 or winning nothing

Framing – Risk Seeking -Losses

• We tend to make riskier decisions when the issue is framed as a potential loss (we’re risk seeking, more likely to take a chance)

• Most people will select to take a 50-50 chance of losing $20,000 or losing nothing, rather than lose $10,000 for sure

Take Away Points - Framing

• Before making important decisions

– Frame the issue as both potential gains and potential loses

– Frame the issue in an alternative or reverse manner (mortality rate vs. survival rate)

– Seek out the views of those with different perspectives

Questions ?????

• Systems 1 and 2 Thinking• Overconfidence and Optimists• What You See Is All There Is (WYSIATI)• Base Rates• Status Quo/Default Bias• Availability of Information• Confirmation Bias• Anchoring• Framing – WYSIATI• Framing – Risk Aversion-Gains/Risk Seeking-Losses

Take Away Points – For Important Decisions

• Don’t fall victim of WYSIATI• Frame situations in terms of both gains and losses (or positives and

negatives) before making decisions• Be weary of relying on intuition, if not based upon prolonged practice in

a predictable environment• Recognize that availability of information influence us and seek data

(including base rates) to determine frequency of events• Know that when a number has been presented it anchors our decisions

and we should mobilize ourselves to combat the effect • Seek the views of outsiders who hold different views and give them

serious consideration: – We rarely seek others’ views– When we do seek them, we often ignore them

Thank you!

Robert J. Oppenheimer, PhD

Professor Emeritus

Concordia University, Montreal Canada

[email protected]

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