MANAGERIAL JUDGMENT:
When Good Managers
Make Bad Decisions
Professor Jill Klein
Melbourne Business School
Why Good Decisions Are Hard
Our brains developed to make hunter-gatherer
decisions that enhanced survival.
In the modern world this leads to systematic
mistakes in decisions, management and
leadership.
Hope…
 Cognitive and social psychologists have worked for
years to understand these problems
 New scientific knowledge allows us to pinpoint our
deficiencies and uncover remedies
Overconfidence
Framing
Anchoring
Confirmatory Bias
COGNITIVE BIASES:
DESCRIPTION AND REMEDIES
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.
90% Confidence Range
Low
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 Magellan’s 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)
High
Overconfidence Quiz: Answers
1. Weight of an Airbus A340-600?
218,000 kilograms or 240 tons
2. Year of Steinbeck’s Nobel Prize?
1962
3. Miles to the moon?
238,850 (384309 km)
4. Miles between Madrid and Bagdad?
2,677 (4307 km)
5. Year the Coliseum was completed?
A.D. 80
Overconfidence Quiz: Answers
6. Height of Aswan High Dam?
114 meters or 375 feet
7. Year of first circumnavigation of the globe?
1522
8. Year of Gandhi’s birth?
1869
9. Surface area of Mediterranean?
970,000 square miles (1561067 square km)
10. Gestational period of great blue whale?
335 days
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
Overconfidence
 Having a greater degree of confidence in
one’s knowledge, forecasts, etc. than is
justified
 Thinking you will be correct more often than you
are
Overconfidence
Percentage of Misses
Type of People
Tested
Harvard MBA’s
Ideal
Target
Actually
Observed
2%
46%
10%
50%
50%
79%
General Business Facts
5%
80%
Company-Specific Facts
5%
58%
0-20%
82%
Types of Questions Asked
Trivia Facts
Chemical Industry Facts
Employees of a
Chemical Company Company-Specific Facts
Managers of a
Computer
Company
Physicians
Probability that a Patient has
Pneumonia
Overconfidence Among Experts
There is no correlation between how confident a person is
(or how confident he or she appears to be)
and accuracy.
Overconfidence
 82% of people say they are in the top 30% of safe
drivers
 Project management
 Almost all cost estimates for construction projects
exceed initial estimates by at least 20% (the median
is 100%)
 Overconfident to finish on time
 Final Offer Arbitration
 70% of bidders believe that their bid will be preferred
by the arbiter
Overconfidence Bias:
Remedies
 Average judgment of a group is almost
always better than an individual judgment
– The Wisdom of Crowds
 Collect other opinions
 Averaging even 1 other option with yours
is an improvement
 Averaging even your own 2nd opinion with
your 1st opinion is an improvement
Overconfidence Bias:
Remedies
 Think about extremes before the middle
 Separate “deciding” from “doing”
 Be a realist when deciding; confine optimism to
implementation
Overconfidence Bias:
Remedies
 Be contrarian
 Ask yourself “why might I be wrong?”
 Don’t demand high confidence and narrow
intervals from others
 Try to better calibrate your metaknowledge
 Practice and look for feedback
Overconfidence Bias:
Remedies
 Keep a Decision Diary
 Be honest with yourself
 Don’t rationalize failures (all failures must count)
 Define specific objectives and what constitutes
success at the outset
Decision Diary
Date
Decision to
be Made
Decision
Definition
of Success
Date for
Evaluation
Evaluation
Learnings
Overconfidence
Framing
Anchoring
Confirmation
COGNITIVE BIASES
Framing
A story is told about two monks who were heavy
smokers. Concerned that smoking was inconsistent with
their commitment to a life of prayer and devotion, they
decided 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 I smoke, would it be permitted to say a prayer
to the Lord?”
“Yes,” the prefect replied, “of course!”
Framing
 Frames draw attention to certain
aspects of a problem, while leaving
others in the shadows, hidden
from our view
 Mindset or mental model: simplifies
our understanding of a complex
reality
 But… can limit our view and the
options we consider
Framing
One Frame
Alternative Frame
Negotiation
Competition, win-lose
Joint problem solving,
win-win
Training
Cost
Investment
Buyer-Seller Exchange
A transaction
Part of a relationship
Frame Dependence Remedies:
Awareness
What issues does the frame address most?
What boundaries do I put on the problem? In particular, what aspects of
the situation 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
frame the 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)
Frame Dependence Remedies:
Falsify Frame
 Try to falsify your frame
Customers care
mostly about price,
secondarily service
 Role play devil’s advocate
Customers care
mostly about
service,
secondarily price
Frame Dependence Remedies:
Find or Build Better Frames
 Talk to someone with different training or
background or from a different industry
 Ask “How do you see it?” “What am I
overlooking?”
 Pharma moving to OTC… brought in people from
P&G
 Talk to other stakeholders (suppliers, citizens)
Overconfidence
Framing
Anchoring
Confirmation
COGNITIVE BIASES
Anchoring Bias
What are the last three digits of your
mobile number?
1. __________
Add 400 to your answer from 1 above
and total
2. __________
Do you think Attila the Hun was defeated
in Europe before or after (use date from 2
above) A.D.
Before____ After _____
In what year do you think Attila the
Hun was actually defeated?
_________ A.D.
Anchoring Bias
Last Three Digits
of Phone Number
plus 400
Average Estimate
of the Year
of Attila’s Defeat
400 to 599
629
600 to 799
680
800 to 999
789
1000 to 1199
885
1200 to 1399
988
Actual date = 451
Anchoring Bias
Mean:
1098 m
≈ 1.1 billion
Mean:
18.9 billion
Version 1
What is your best
guess of the annual
Australian egg
production (in millions)?
____________
Version 2
What is your best
guess of the annual
Australian egg
production (in billions)?
____________
Actual production:
2.44 Billion
What units do you
do your budgeting in?
Anchoring Bias
 Often observed in
 Project Completion Time Estimates
 Revenue Estimates
 Budgeting
 Resourcing projects
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)
Overconfidence
Framing
Anchoring
Confirmation
COGNITIVE BIASES
Confirmatory Bias:
Confirming Expectations
5
Rich Hannah
Grade
Level
4
Poor Hannah
3
2
Initial Impression
After Test
Confirmation Bias
 Preference for information that is consistent with
beliefs rather than information that goes against
beliefs
 More likely to draw conclusions that suggest
 Desired option is best
 Pre-existing beliefs are correct
 You have status and are successful
 Also referred to as “motivated reasoning”
Examples
Of 161 studies on
risks of four
chemicals used in
drugs
Of 100 clinical
studies to see if a
new drug is more
effective than an old
drug
Funded
by Industry
Funded
by Drug Companies
14% found harmful
effects
13% favored old
drug
Funded
Independently
Funded
Independently
60% found harmful
effects
87% favored old
drug
Enron
Mr. Skilling's testimony revealed that he
increasingly sought validation for what he
believed, rather than listening carefully when
he was told about problems at the company.
Mr. Skilling sought assurances that everything
happening in California's newly deregulated
electricity market was on the up and up.
Enron has to be "absolutely pure as the driven
snow," Mr. Skilling told Richard Sanders, then an
Enron lawyer. "So one more time," he said. "We're
pure as the driven snow, right?”
From NYT (April 21, 2006)
Leadership and the Confirmatory Bias
 Executives who are more likely to display
confirmatory bias:
 Interact only with a small circle of managers, employees, etc.
 Have barriers around them (e.g., admin assts) who protect




them
“Solicit” input but only smile and nod at select comments
Shoot the Messenger: Contrary positions are taken as
“disloyal”
Involve an “expert” with an established point of view to offer
advice consistent with own point of view
Choose the data—or ways of looking at the data—that are
consistent with their point of view
Confirmatory Bias: Remedies
 Be aware that you will tend to confirm your
beliefs
 Ask disconfirming questions
 Try to obtain information that disconfirms your
opinion or your data sources
 Think of reasons why your opinions or data might be
wrong
 Entertain and test multiple opinions
 At least temporarily, pretend others are right (even if
you don’t think they are)
 Engage in Prospective Hindsight
Further Reading
Dan Ariely