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This chapter describes three heuristics that are employed in making judgments under uncertainty. However, the reliance on this rule leads to systematic errors in the estimation of distance. These judgments are all based on data of limited validity, which are processed according to heuristic rules. The subjective assessment of probability resembles the subjective assessment of physical quantities such as distance or size. In general, the heuristics are quite useful, but sometimes they lead to severe and systematic errors. Occasionally, beliefs concerning uncertain events are expressed in numerical form as odds or subjective probabilities. Many decisions are based on beliefs concerning the likelihood of uncertain events such as the outcome of an election, the guilt of a defendant, or the future value of the dollar.
The anchoring trap how to#
The authors show how to take action to ensure that important business decisions are sound and reliable. The best way to avoid all the traps is awareness-forewarned is forearmed. And the recallability trap leads us to give undue weight to recent, dramatic events. The prudence trap leads us to be overcautious when we make estimates about uncertain events.
The overconfidence trap makes us over-estimate the accuracy of our forecasts. The framing trap occurs when we misstate a problem, undermining the entire decision-making process. The confirming-evidence trap leads us to seek out information supporting an existing predilection and to discount opposing information. The sunk-cost trap inclines us to perpetuate the mistakes of the past. The status-quo trap biases us toward maintaining the current situation-even when better alternatives exist. The anchoring trap leads us to give disproportionate weight to the first information we receive. Eight psychological traps that are particularly likely to affect the way we make business decisions are examined. The way the human brain works can sabotage the choices we make. But sometimes the fault lies not in the decision-making process but rather in the mind of the decision maker. Their impact is illustrated using real examples.īad decisions can often be traced back to the way the decisions were made-the alternatives were not clearly defined, the right information was not collected, the costs and benefits were not accurately weighed. The aim of the article is to provide an overview of the various pitfalls that complicate and influence in a significant way the resulting quality of decision making and particularly the innovativeness of the solution. The traps mentioned include information overload, framing of the problem, anchoring and value attribution, status quo, estimates and forecasts, procrastination, sunk costs and paralysis of choice. Each of the traps is described including a suitable practical example. The second part of the article already describes the specific traps which appear within the decision-making process. What is important is the deep-rooted loss aversion. This is connected with so-called mental accounting and the prospect theory, the role of emotions and the subconscious. The first part specifies the starting points of this irrationality, which include particularly the fact that everything is relative.
The article focuses on the issue of irrationality in human conduct and its influence on managerial decision making and mostly the innovativeness of the variants.
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