Chapter 14 - Decision Making Biases
 Forecasting
Biases  misinformation to be used
in making Decisions
 Decision Bias 
Information can still lead to biased decisions
Confirmation bias
Decision tendencies to go with …..
Status quo
Ignore sunk cost
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Sunk Cost
 Made
initial (even limited) investment & small return
 Sunk cost and decision – choose the option you invested in rather than
one you prefer (Ski trip)
 Sunk cost with escalation  continued investment even though future
yield would not warrant additional investment
 Big Dig – once a billion dollars have been sent can you cancel project
 After taking 1 or 2 courses in a degree program  continue
 Future investments or commitments should be based on future value
and not on past investments
 Psychology –
 do not want to appear wasteful personally
 Affects your image in organization – made mistake
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Sunk Cost Examples

Affects choice: You have bought tickets for a weekend skiing
trip in Michigan for $100.You later buy $50 tickets for a
similar vacation in Wisconsin. Based on past experience, you
anticipate that you will enjoy the weekend in Wisconsin even
more than the weekend in Michigan. But then you realize
that the tickets are for the same dates. Your only option is to
choose one weekend over the other.
 In a survey of 61 students, 54% chose Michigan over Wisconsin as
the preferred ski trip

With escalation of commitment
 War with continuing deaths
 Dessert or rented movie (escalation continue on)
 First drafts in basketball & Playing time
 Continued employment of incompetent employees
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Faulty analysis and de-Escalation of Commitment
 Costs
already spent should have no affect on
analysis of ROI for future investments.
Consider only future benefits and future costs
Escalation – tendency to want to recover the investment
previously made  not give up
De-escalation – Calculate the amount that was already
lost and include the spent money as part of the
investment in the ROI calculation.  Need higher return
on future investment to reach goal of ROI on total
investment
Overvalue that things did not go well so far.
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Your own examples – Sunk Cost
 Your
organization
Sunk cost bias
Overcame sunk cost bias
 Your
personal
Sunk cost bias
Overcame sunk cost bias
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Overcome bias
 New
decision maker not tied to original
investment
Eliminating car brands
 loans to failing clients
Ending war
 Require
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financial justification
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Framing
 Scenario
I: Choose the program you would prefer to
implement.
 A: Two hundred people will be saved.
 B: There is a one-third probability that 600 will be saved and a twothird probability that no one will be saved.
 Scenario
II: Choose the program you would prefer to
implement.
 A: Four hundred people will die.
 B: There is a one-third probability that no one will die and twothird probability that 600 people will die.
 Scenario
I A selected by 72% people (Positive frame)
 Scenario II B selected by 78% people (Negative frame)
 Led to Prospect Theory.
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Examples
 Coca
Cola Classic  framed as continuing loss of
market share (Take more risk)
 Doctors present information focus on
Likelihood of survival
Likelihood of bad outcome
 100%
of less is preferred to 99% of more 
overvalue certainty.
 Insurance policies with deductibles or rebates
 Credit card or cash  discount for cash or
premium for card
 Overuse of percentages instead of absolute values
 Frame election outcome relative to expectations
 Buy 1 get one free or two for the price of one
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Status Quo (and Omission)
 Define
– tendency to stay with what you have even
when limited vested interest in original decisions
 Examples with little or no transition cost
Inherit a portfolio of stocks
Change health insurance plans
Personal experience
 Endowment
effect (own something)
 With
transition costs – often uncertainty with new
alternative
 Brand loyalty for satisfied customer
 Linked
with Omission bias – More regret with doing
something and negative outcome that with doing
nothing and negative outcome.
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Status quo examples
 Higher
selling price than buying price
 No cost trial
 Money back guarantee
 Subscription free for first few months but can
cancel any time
 Status quo of pension policies
 Social benefit of status quo??
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Overcome status quo
 Treat
status quo and alternatives equally
Zero based budgeting
 Force
consideration of a change
Request bids from other suppliers
Force rank low performers in a company
 Sunset
laws – Bush tax cuts
 Experts – standards for medical testing
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Your own examples – Status Quo
 Your
organization
Status Quo bias
Overcame Status Quo bias
 Your
personal
Status Quo bias
Overcame Status Quo bias
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Sunk Cost & Status Quo
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Regret (powerful emotion) Aversion

Anticipatory regret – insurance deductibles , extended
warranty
 Can be manipulated
 Car rental companies raise your awareness (possible accident)
 Health care behavior
Linked to responsibility – less to regret if going with industry
leader
 Retrospective long term regret – looking back on life

 Regret inaction
 Retrospective short term (hot) regret – linked to actions gone bad

Regret as compared to the normative
 Try everything for someone dying
 Not in immediate danger – fear action might make things worse

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Regret greater in presence of feedback
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Propositions in Regret Regulation Theory
1.
Regret is an aversive, cognitive emotion that people are motivated to regulate in order to maximize
outcomes in the short term and learn maximizing them in the long run.
2.
Regret is a comparison-based emotion of self-blame, experienced when people realize or imagine that
their present situation would have been better had they decided differently in the past.
3.
Regret is distinct from related other specific emotions such as anger, disappointment, envy, guilt, sadness,
and shame and from general negative affect on the basis of its appraisals, experiential content, and
behavioral consequences.
4.
Individual differences in the tendency to experience regret are reliably related to the tendency to
maximize and compare one’s outcomes.
5.
Regret can be experienced about past (“retrospective regret”) and future (“anticipated or prospective
regret”) decisions.
6.
Anticipated regret is experienced when decisions are difficult and important and when the decision maker
expects to learn the outcomes of both the chosen and rejected options quickly.
7.
Regret can stem from decisions to act and from decisions not to act: The more justifiable the decision, the
less regret.
8.
Regret can be experienced about decision process (“process regret”) and decision outcomes (“outcome
regret”).
9.
Regret aversion is distinct from risk aversion, and they jointly and independently influence behavioral
decisions.
10.
Regret regulation strategies are decision-, alternative-, or feeling-focused and implemented based on their
accessibility and their instrumentality to the current overarching goal.
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Towards Fairness “Bias”
 Willingness
to give up something in order to
achieve a more fair situation – contradicts
fundamental utility theory
 Ultimatum Game – allocate $100
 Wage fairness –
two tiered workers
CEOs have adopted a different measuring yardstick –
other CEOs and not their own workers
In 1965, CEO salaries averaged 24 times the average salary
of a worker. By 1978 this number had grown to 35 and by
1989 to 71. By 2005, CEO salaries were a staggering 262
times the average worker’s salary.
 Taking
advantage of a financial handicap or threat of
lost jobs
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Your own examples – Fairness
 Your
organization
Fairness bias – exits or non-existent
 Your
personal
Fairness bias
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Mood - incidental
 Anger
 actions to regret: e-mails
Do not consider many alternatives
Eagerness to act
Risk prone – optimistic actions will have impact
 Anxiety
 low risk/low reward but
 Sad  high reqard and less security
 Good mood  risk averse to mood changing loss
 Provide Example
Chapter
Personal experience
 Overcome
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Your own examples – Mood
 Your
organization
Mood of executives?
 Your
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personal moods
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Groupthink
 Define
 Provide
Example
Chapter
Personal experience
 Overcome
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Boston Consulting Group
 Use
Biases to define features
 Use biases to define sequence of decisions
How information is displayed.
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IE 7720
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