Prof Jill Klein Forum Presentation

7/31/2019 Prof Jill Klein Forum Presentation

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IMPROVING YOUR

JUDGMENT

Professor Jill KleinMelbourne Business School


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Why Good Decisions Are Hard

Our brains developed to make hunter-gathererdecisions that enhanced survival.

In the modern world this leads to systematicmistakes in decisions, management and

leadership.


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Hope

Cognitive and social psychologists have worked foryears to understand these problems

New scientific knowledge allows us to pinpoint our

deficiencies and uncover remedies


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COGNITIVE BIASES

OverconfidenceFramingAnchoringConfirmation


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For each of the following ten items, provide a low and high guess such that you are 90 percent sure

the correct answer falls between the two. Your challenge is to be neither too narrow (i.e., overconfident)nor too wide (i.e., under confident).

If you successfully meet this challenge you should have 10 percent misses that is, exactly one miss.

Low High

1. What is the weight of an empty Airbus A340-600 (in kilograms or tons?)2. In what year did John Steinbeck win the Nobel Prize for literature?

3. What is the distance (in kilometers or miles) from the Earth to the Moon?

4. What is the air distance (in kilometers or miles) from Madrid to Baghdad?

5. In what year was the construction of the Roman Coliseum completed?

6. What is the height (in meters or feet) of the Aswan High Dam?

7. In what year did Magellans crew complete the first naval circumnavigation of the globe?

8. In what year was Mohandas K. Gandhi born?

9. What is the surface area (in square kilometers or miles) of the Mediterranean Sea?

10. What is the gestation period of the great blue whale?

* Winning Decisions, by Russo and Schoemaker (2002)

90% Confidence Range


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Overconfidence

Having a greater degree of confidence inones knowledge, forecasts, etc. than is

justified Thinking you will be correct more often than you

are


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Overconfidence: Robust Finding

Study of 2000 managers around the world Less than 1% got only 1 wrong

Most miss 4 7 questions

No strong cross-cultural differences


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Overconfidence

Percentage of Misses

Type of PeopleTested

Types of Questions AskedIdeal

TargetActually

Observed

Harvard MBAs Trivia Facts 2% 46%

Employees of aChemicalCompany

Chemical Industry Facts 10% 50%

Company-Specific Facts 50% 79%

Managers of aComputerCompany

General Business Facts 5% 80%

Company-Specific Facts 5% 58%

PhysiciansProbability that a Patient hasPneumonia

0-20% 82%


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Overconfidence

82% of people say they are in the top 30% of safe drivers

86% of Harvard Business School MBAs say they are betterlooking than their classmates

68% of lawyers in civil cases believe that their side willprevail

Project management Almost all cost estimates for construction projects

exceed initial estimates by at least 20% (the medianis 100%)

Overconfident to finish on time Final Offer Arbitration

70% of bidders believe that their bid will be preferredby the arbiter


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Why Are We So

Over Confident?- Discuss at Tables- Come up with 2-3 reasons


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Overconfidence Among Experts

There is no correlation between how confident a person is(or how confident he or she appears to be)

and accuracy.


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Overconfidence Bias:

Remedies

Average judgment of a group is almostalways better than an individual judgmentThe Wisdom of Crowds

Collect other opinions Averaging even 1 other option with yours

is an improvement

Averaging even your own 2nd opinion withyour 1st opinion is an improvement


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Overconfidence Bias:

Remedies

Think about extremes before the middle Separate deciding from doing

Be a realistwhen deciding; confine optimism toimplementation

Be contrarian Ask yourself why might I be wrong?

Dont demand high confidence and narrow intervalsfrom others

Try to better calibrate your metaknowledge Practice and look for feedback

Keep a decision-diary


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Decision Diary

DateDecision to

be MadeDecision

ProcessUsed

Definitionof Success

Date forEvaluation

Evaluation Learnings


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COGNITIVE BIASES

OverconfidenceFramingAnchoringConfirmation


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Framing

A story is told about two monks who were heavysmokers. Concerned that smoking was inconsistent withtheir commitment to a life of prayer and devotion, theydecided to ask their prefect for guidance. The first asked,Father, would it be permitted to smoke while I am

praying to the Lord?

The answer was a resounding no.

The second asked, Father, when in moments of weakness Ismoke, would it be permitted to say a prayer to theLord?

Yes, the prefect replied, of course!


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Framing

Frames draw attention to certainaspects of a problem, while leavingothers in the shadows, hidden

from our view Mindset or mental model: simplifies

our understanding of a complexreality

But can limit our view and theoptions we consider


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You are the CEO of a Fortune 500 company faced with a difficult choice. Due to structural

changes in the economy that seem irreversible, one of the divisions of your company is

threatened with a partial, and possibly a complete, shutdown. This division currently employs6000 workers. Your staff has identified two options. Option A entails a partial shutdown and the

permanent layoff of some of the workers. Option B entails taking a gamble that will result in

either 0 or 6000 jobs. Specifically, the two options are as follows:

Version 2Option A : exactly 4000 jobs lost.Option B : 1/3 probability 0f no jobs lost and a 2/3 probability 6000

jobs lost.

A: 55%

B: 45%

Version 1Option A : exactly 2000 jobs saved.Option B : 1/3 probability 6000 jobs saved and a 2/3

probability 0f no jobs saved.

A: 86%

B: 14%

Facing gains,so risk averse

Facing losses,so risk seeking

Tested all over the world similar results


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Examples of Framing: Dan Ariely


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Frame Dependence Remedies:Awareness

What issues does the frame address most?

What boundaries do I put on the problem? In particular, what aspects of thesituation do I leave out of consideration?

What yardsticks and reference points do I use to measure success?

What metaphors, if any, do I use in thinking about this issue? (football, war,family)

Why do I think about this question this way? What training or experiences framethe way I view the world?

What does the frame emphasize or minimize?

Do other people in my profession or industry think abut this problem differently?How? Why? Are their frames successful?

* Winning Decisions, by Russo and Schoemaker (2002)

d d


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Frame Dependence Remedies:Falsify Frame

Try to falsify your frame

Role play devils advocate

A sale is atransaction

A sale is part of

relationshipmanagement

A negotiation is winor lose

A negotiation can bewin-win

d d


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Frame Dependence Remedies:Find or Build Better Frames

Talk to someone with different training orbackground or from a different industry

Ask How do you see it? What am Ioverlooking?

Pharma moving to OTC brought in people fromP&G

Talk to other stakeholders (suppliers,customers)


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What frames affect decisions where

you work?What remedies could you use?


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COGNITIVE BIASES

Overconfidence

FramingAnchoringConfirmation


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An initial starting point has anundue influence on our judgment


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Anchoring Bias

Version 1

What is your best guessof the annual Australianegg production (inmillions)?

____________

Version 2

What is your best guess

of the annual Australianegg production (inbillions)?____________

Mean:2018 m

2.0billion

Mean:41.2 billion

What units do you do your budgeting in?

Euro/USD exchangeabove or below .6

.68

Euro/USD exchangeabove or below 1.6

1.5

Actual production:

2.44 Billion


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Anchored to a Random Number


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Anchoring Bias

Often observed in

Project Completion Time Estimates

Sale Estimates

Budgeting

Resourcing projects


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Anchoring Bias:Remedies

Be aware of the anchor you may be using

Try multiple anchors

Most recent similar project completion time

Average of last 10 projects

An optimistic forecast (nothing goes wrong)

A pessimistic forecast (everything goes wrong)


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How might anchors affect thevaluation decisions that you make

at work?


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COGNITIVE BIASES

Overconfidence

FramingAnchoringConfirmation


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Confirmatory Bias:Confirming Expectations

Rich Hannah

Poor HannahGradeLevel


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Confirmation bias

Preference for information that isconsistent with beliefs rather thaninformation that goes against beliefs

More likely to draw conclusions that suggest

Positive outcomes

Support for pre-existing beliefs

Confirm status and success

Also referred to as motivated reasoning


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Remedies

Similar to overconfidence remedies

Generate alternative hypotheses

Look for both confirming and disconfirmingevidence

At least temporarily, pretend others are right(even if you dont think they are)


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Further Reading

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