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"The hidden traps in decision making"

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Valeria Pribegina

on 5 November 2014

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Transcript of "The hidden traps in decision making"

The status quo trap
The anchoring trap
Initial impressions, estimates, or data anchor subsequent thoughts and judgments. In business,
the anchor is a past event or trend.

What factors are you going to take into account while projecting future sales for a product?
The Status Quo Trap

When does the trap come from?

The sunk cost trap
Making decisions in a way that justifies past choices, even when those turned out to be bad

• Why?
People are unwilling to admit publically to a mistake

Pumping more money into a bad running business even though a turn-around seems unlikely.

The Status Quo Trap


Ways out:
-Match your objectives to the status quo: sometimes the status quo it’s nothing but a barrier

-The status quo is not the only alternative, nor the one best way: weigh up all the possibilities ( pro – contra approach )

-Would you choose the status quo, if it was not so?

-Apply long-term thinking: would status quo suits in the future?

-Force yourself to choose the best alternative !

The sunk cost trap
How to avoid it?
– Make a conscious effort to set aside sunk costs.
– Listen to people that are uninvolved with the past decision.
– Remember that even smart choices might have bad consequences.
– Avoid a failure fearing culture.

– View a problem from different perspectives, try using alternative starting points
– Think about the problem on your own before consulting others
– Be open-minded
– Avoid anchoring yours advisers, consultants and others
– Be aware of anchors in negotiations, think through your position

"The hidden traps in decision making"
In business the sins of commission (doing something)
is much more severe than the one of omission (doing nothing)

The framing trap
How to avoid it?
–– Think hard and take your time throughout your decision-making process about the framing of the problem.
– Don't accept the initial frame immediately, whether it was formulated by you or by someone else.
– Always try to reframe the problem in various ways and look for distortions.
– Even if you think you found the right frame keep asking yourself how your thinking might change if the framing changed.
– Listen to others' recommendations, compare them with your choice of frame.

How to avoid it?
- Examine all the evidences with the same rigor
-Be honest with your motives :does it help you to make a smart choice?
-Don’t ask leading questions when you need the advice of others: it leads to confirm the trap

The confirming-evidence trap
The framing trap
Focusing on the word order and on the content of a question presenting an existing problem, choice or solution in a way people can be persuaded easier to deal with, choose or accept it.

• Why?
It can influence the thinking and final decision of the individuals about a peculiar question.

The confirming-evidence trap
It affects the sources where we collect evidences and also how we interpret this information. That leads us to give too much weight to supporting information and too little to conflicting information. The reason is that we:
1. We decide what we want to do
2. We decide why we want to do it

We are more engaged by things we like than those we don’t like

Let's say you have €2,000 in your account and you are asked the following question:
- Would you accept a fifty-fifty chance of either losing €300 or winning €500?
- Would you prefer to keep your account balance of €2,000 or to accept a fifty-fifty chance of having either €1,700 or €2,500 in your account?

Studies have shown that people would reject the first question, on the other hand, would more likely accept the second one, even if the questions ask the same thing just in a different frame.

The estimating and forecasting trap
How to avoid it?

-To reduce the effect of overconfidence in making estimate, always start by considering the extremes(extreme ranges of variables) Then challenge your estimates of the extremes and do the same for your subordinates and advisers.

-To avoid the prudence trap always express your estimates honestly and explain to anyone who is going to use them that they haven’t been adjusted. Emphasize the need for honest to anyone who will be supplying you with estimates. Test estimates over a reasonable range to assess their impact and take a second look at the more sensitive ones.

-To minimize the recallability traps carefully examine all your assumptions to ensure they are not excessively influenced by your memory. Get real statistics whenever possible and try not to be guided by impression

The estimating and forecasting traps

Overconfidence trap:
when we tend to be overconfident about our estimations, then this can lead to errors in judgement and in bad decisions(when managers overestimate or underestimate some crucial variables then they may miss attractive opportunities or expose themselves to a great risk)

Prudence trap:
when we face crucial decisions we tend to adjust our estimates in order to be as safe as possible and this leads to overcautiousness (which is also dangerous to assess probabilities)

Recallability trap:
when we base our predictions about future events on our memory of past events(dramatic events in our lives can leave a strong impression on our memory and this distorts our thinking to assess probabilities)

The Anchoring Trap
Ways out:
Full transcript