Carter Racing
Evidence based decision making:
- looked at all the evidence on both sides and made a decision together
- Leads to better decision making
Decision based evidence making (Prof made most of us think and use this process)
- Focus selectively only on evidence that supports their decision and you ignore all the
evidence that doesn’t support your decision
Groupthink:
- Is when there is social pressure to conform to the majority decision and people want to
rather than rock the boat in relationships and argue with people, they choose to have a
seemingly unanimous decision.
Warnings of group think:
- Teams isolating themselves from external sources of information
- Feeling under pressure
- Exhibiting defensiveness – e.g., Stereotyping others
- Feeling they are doing what is moral or “right”
- Minimizing the public expression of doubt
- Having strong leaders that intentionally or unintentionally discourage input or real
debate
- Creating the illusion of unanimity by self-censorship
- Creating the illusion of invulnerability
-
How to AVOID groupthink:
Assign a Devils advocate
Objective leaders who don’t state their preference first to encourage debate and avoid
confirmation bias with partners
Norms that encourage dissent and communication
Outside experts who can challenge the views of core members
Use subgroups to work on the same problems
After reaching a preliminary consensus, then hold a “second guess meeting” to see if
everyone still feels the same way
Risky Shift:
- you can take six people who are 80% each 80% sure that they wanted to race and
suddenly, your group decision will be 100% sure that you want to race.
Conservative shift:
- you can have people who say you know I’ve got about 75% sure I don't want to race and
then everybody else feels the same way and then, all of a sudden, the group is really,
really confident that they don't want to race
^_This suggests that the best financial decision would be to race
^_Chief mechanic did the analysis wrong and came to the wrong decision
when you're making decisions, always make sure you understand the analysis that's
been done because wrong analysis can lead to wrong decision making right.
that's a problem called sampling on the dependent variable so he was interested in
looking at the what caused the gasket to blow, which was the dependent variable.
But he only looked at the cases that had that and so he wasn't able to see the
relationship with the temperature, you need to sample the full set of races,
regardless of whether the gas is blue or the didn't in order to see the relationship
Framing
- the information is framed in net in a negative or a last frame it encourages risk, so we
take a chance and losing less rather than accept a sure bet.
- They would rather gamble then it's possible they were thinking about it in a negative friend
they're thinking about the fact that they'd already delayed that they.
- NASA was using the loss framework, so they chose the riskier decision
Prospect Theory – Loss Aversion
- The value of a gain is less than the value of a loss, a loss of X hurts about twice as much as
a gain of X pleases so that's why, when things framed in terms of gaining we like the
conservative decision because we get what we get.
- In a loss framing, we gamble we like the riskier decision because we're doing anything we
can to avoid the loss because they hurt a lot
The girl wondering if she should keep repairing her car or if she should just cover her losses and
buy a new car that doesn’t need maintenance.
Escalation of commitment – Why?
1. People want to reduce dissonance by recouping the “sunk costs” (Self-Justification
Theory)
a. you feel lousy about the fact that you spend $3,000 and it didn't work out and
that creates cognitive dissonance was makes people uncomfortable and then you
just want to justify that
2. Overconfidence (Confirmation Bias)
a. you can have an irrational belief that the additional investment will succeed. Even
though it may not you just might not be thinking straight.
3. Problem framing after a sunk cost (Loss Aversion based on Prospect Theory)
a. People would rather risk gambling spending more money, because the loss of just
spending $3,000 and still not having your car work hurts.
b. A decision betweena sure loss of X dollars and an uncertain loss of X+Y dollars
4. Social norms favour consistent behaviour (impression Management)
a. typically, we tend to punish people if they change their mind, right if they
recapitulate and change their mind. For example, we punish politicians for
changing their minds on issues, even though sometimes it might be right thing to
do
Escalation of commitment: More Likely When…
1. If you are the original decision maker
2. High sunk costs
3. Project is close to completion
4. If it is really easy to blame past failures on things outside of your control
(unforeseeable, exogenous events)
5. Both groups and individuals can escalate their commitment
* it's okay to change your mind often, particularly in the face of new data*
Escalation of commitment: Prescriptions;
- Actively seek out disconfirming information about a chosen alternative
o Challenge all of the alternatives and make sure that you are looking at it in a
critical light, as well a positive one
- Reframe your losses as gains to prevent risk-seeking behaviour
o If you're worried that it's feeling like a loss and you're going to take a riskier
decision that you want to think about reframing it as a gain instead of as a loss
and see if that changes your mind.
- Structure incentives so that decision makers are not punished for inconsistency
o Public decision makers are often punished for inconsistency, so you can make it
Okay, so that people are not punished for inconsistency in it, and they're actually
allowed to change their mind
- Hand off decisions about whether to commit or to not commit more resources o an
investment to new decision makers
o A different committee should make the second decision to review whether my
decision was a good one, or not so try to break it apart and have second decision
makers.
- Be careful to NOT consider sunk costs
o They are gone and will never come back
- Make sure decision makers are frequently reminded of the goals of the investment
o Need to think about the ultimate objective and is this decision going to lead to
that
Abilene Paradox:
-
This occurs when individuals feel their objections are not strong enough to support
changing the minds of other people in the group it's commonly referred to as rocking the
boat
Availability Heuristic:
- People predict the frequency of an event, or a proportion within a population, based on
how easily and how readily available an example can be brought to mind (salience of
event)
- Decision makers tend to remember and incorporate vivid, recent events into their
decisions
- Implications: Performance appraisals, choice of suppliers
Representative Heuristic:
- People judge the probability or frequency of a hypothesis by considering how much the
hypothesis resembles available data as opposed to using a Bayesian calculation.
o A rule for categorization based on how similar the person or object is to our
prototypes for that category
o Neglecting base rate (apply our stereotypes)
- Implications: New business ventures; sales projections; hiring decisions
Gamblers Fallacy:
- Mistaken notion that the odds for something with a fixed probability increase or
decrease depending upon recent occurrences
o “Well I lost 4 times already the next time has to be a winner”
Anchoring and Adjustment:
- The common human tendency to rely too heavily, or “anchor”, on one trait or piece of
information when making decisions
- People develop estimates by starting from an initial anchor, based on whatever
information is provided, and adjusting from there to yield a final answer.
- Implications: Salary negotiations; pricing