Lecture Judgment in managerial decision making (8e) - Chapter 3: Common biases

After studying this chapter, you should be able to: Articulate the role of the external environment in management decisions and effectiveness, explain the five major dimensions of an organization’s general environment, describe the critical forces in the organization’s task environment,…

Judgment in Managerial Decision

Making 8e

Chapter 3 Common Biases

Copyright 2013 John Wiley & Sons

Problem 1: Causes of Death

• Rank order causes of death

• Estimate death rates

Rank Cause of Death Deaths in 2009

War and civil conflict

Nutritional deficiencies, including starvation

Respiratory infections, lung cancers, and lung diseases

Problem 2: Words with “a”

What percentage of words in the English

language begin with the letter “a”?

Problem 3: Words with “a”

What percentage of words in the English language have the letter “a” as their third

letter?

Lisa is 33 and is pregnant for the first time She is worried about birth defects such as Down syndrome Her doctor tells her that she need not worry too much because

there is only a 1 in 1,000 chance that a

woman of her age will have a baby with

Down syndrome Nevertheless, Lisa

remains anxious about this possibility and decides to obtain a test, known as the

Triple Screen, which can detect Down

syndrome The test is moderately accurate: When a baby has Down syndrome, the test delivers a positive result 86% of the time There is, however, a small “false positive” rate: 5% of babies produce a positive result despite not having Down syndrome Lisa

takes the Triple Screen and obtains a

positive result for Down syndrome Given this test result, what are the chances that her baby has Down syndrome?

A certain town is served by two hospitals In the

larger hospital, about 45 babies are born each day

In the smaller hospital, about 15 babies are born each day As you know, about 50 percent of all

babies are boys However, the exact percentage of boys born varies from day to day Sometimes it

may be higher than 50 percent, sometimes lower For a period of one year, each hospital recorded

the days in which more than 60 percent of the

babies born were boys Which hospital do you

think recorded more such days?

a The larger hospital

b The smaller hospital

c About the same (within 5 percent of each other)

Problem 6: Having a Baby

You and your spouse have had three

children together, all of them girls Now that you are expecting your fourth child, you

wonder whether the odds favor having a boy this time What is the best estimate of your probability of having another girl?

a 6.25% (1 in 16) – odds of getting 4 girls in a

row

b 50% (1 in 2) – equal chance of getting either

c Something in between (6.25-50%)

Problem 6: Having a Baby

You and your spouse have had three

children together, all of them girls Now that you are expecting your fourth child, you

wonder whether the odds favor having a boy this time What is the best estimate of your probability of having another girl?

a 6.25% (1 in 16) – odds of getting 4 girls in a

row

b 50% (1 in 2) – equal chance of getting either

c Something in between (6.25-50%)

Problem 7: Batting Averages

• Predict 2011 batting averages

Player 2010 Batting Average Estimated 2011 Batting Average

Problem 8: Describe Linda

Linda is 31 years old, single, outspoken, and very smart She majored in philosophy As a student,

she was deeply concerned with issues of nation and social justice, and she participated in

_Linda is a member of the League of Women Voters.

_Linda is a bank teller.

_Linda is an insurance salesperson.

_Linda is a bank teller who is active in the

feminist movement.

Problem 9: Guess the Date

• Write the last three digits of your phone number and add 1 to the front of the

string, as if it were a year: _

• Was the Taj Mahal completed before or after the date formed by your phone

number?

_Before _After

• What year was the Taj Mahal completed?

Problem 10: Which is More

Likely?

a. Drawing a red marble from a bag

containing 50% red marbles and 50%

white marbles

b. Drawing a red marble seven times in

succession, with replacement, from a bag containing 90% red marbles and 10% red marbles

c. Drawing at least one red marble in seven

tries, with replacement, from a bag

containing 10% red marbles and 90%

white marbles

Problem 10: Which is More

Likely?

a. Drawing a red marble from a bag

containing 50% red marbles and 50%

white marbles

b. Drawing a red marble seven times in

succession, with replacement, from a bag containing 90% red marbles and 10% red marbles

c. Drawing at least one red marble in seven

tries, with replacement, from a bag

containing 10% red marbles and 90%

white marbles

Problem 1 Answers

• Rank order causes of death

• Estimate death rates

Rank Cause of Death Deaths in 2009

3 War and civil conflict 182,000

2 Nutritional deficiencies, including

starvation

418,000

1 Respiratory infections, lung cancers, and

Answers: Problems 2 and 3

What percentage of words in the English

language begin with the letter “a”?

The Availability Heuristic

• Ease of Recall Bias

– Vividness influences recall

– Estimating death rates

– Airline security decisions

– Familiarity of names

– Performance evaluations

• Retrievability Bias

– Ease of retrieval from memory

– Words with “a”

– “n” as sixth letter versus ending in “ing”

– Geographic concentration of similar

businesses

– Hiring decisions

Lisa is 33 and is pregnant for the first time She is worried about birth defects such as Down

syndrome Her doctor tells her that she need not worry too much because there is only a 1 in 1,000 chance that a woman of her age will have a baby with Down syndrome Nevertheless, Lisa remains anxious about this possibility and decides to obtain

a test, known as the Triple Screen, which can

detect Down syndrome The test is moderately

accurate: When a baby has Down syndrome, the test delivers a positive result 86% of the time

There is, however, a small “false positive” rate: 5%

of babies produce a positive result despite not

having Down syndrome Lisa takes the Triple

Screen and obtains a positive result for Down

syndrome Given this test result, what are the

chances that her baby has Down syndrome? 1.7%

• Per 1,000 women Lisa’s age, 999 do not have a baby with Down syndrome.

• 5% of women with a baby that does not

have Down syndrome will receive a false positive test

• 999 * 05 = 49.95 women per 1,000

receive a false positive

• 86% of babies with Down syndrome test positive the first time

• 86*1 = 86 per 1,000 women with a Down syndrome baby receive an accurate

positive test

• 86/(.86 + 49.95) = 1.7% of women who

receive a positive test have a baby with

Down syndrome

A certain town is served by two hospitals In the

larger hospital, about 45 babies are born each day

In the smaller hospital, about 15 babies are born each day As you know, about 50 percent of all

babies are boys However, the exact percentage of boys born varies from day to day Sometimes it

may be higher than 50 percent, sometimes lower For a period of one year, each hospital recorded

the days in which more than 60 percent of the

babies born were boys Which hospital do you

think recorded more such days?

a The larger hospital

b The smaller hospital

c About the same (within 5 percent of each other)

Problem 6: Having a Baby

You and your spouse have had three

children together, all of them girls Now that you are expecting your fourth child, you

wonder whether the odds favor having a boy this time What is the best estimate of your probability of having another girl?

a 6.25% (1 in 16) – odds of getting 4 girls in a

row

b 50% (1 in 2) – equal chance of getting

either

c Something in between (6.25-50%)

Problem 7: Batting Averages

• Texas Rangers: 2010 and 2011

Player 2010 Batting Average 2011 Batting Average

Problem 8: Describe Linda

Linda is 31 years old, single, outspoken, and very smart She majored in philosophy As a student,

she was deeply concerned with issues of nation and social justice, and she participated in

_Linda is a member of the League of Women Voters.

_Linda is a bank teller.

_Linda is an insurance salesperson.

_Linda is a bank teller who is active in the

feminist movement.

The Representativeness

Heuristic

• Insensitivity to base rates

• Insensitivity to sample size

• Misconceptions of chance

• Regression to the mean

• The conjunction fallacy

Problem 9: Guess the Date

• Write the last three digits of your phone number and add 1 to the front of the

string, as if it were a year: _

• Was the Taj Mahal completed before or after the date formed by your phone

number?

_Before _After

• What year was the Taj Mahal completed?

1648

Problem 10: Which is More

Likely?

a. Drawing a red marble from a bag

containing 50% red marbles and 50%

white marbles

b. Drawing a red marble seven times in

succession, with replacement, from a bag containing 90% red marbles and 10% red marbles

c. Drawing at least one red marble in

seven tries, with replacement, from a bag containing 10% red marbles and 90% white marbles

The Confirmation Heuristic

• Seeking to confirm prior information

• Anchoring

– Arbitrary starting points

– Achievement tests for children

– First impressions

– Stereotypes

• Conjunctive and disjunctive events bias

• Heuristics simplify our decisions

• Often, they save us time

• We don’t apply them appropriately