Decision Making Biases and Pitfalls MGT422 Assignment
Decision-Making Biases and Pitfalls
Case Assignment
Even the most intelligent manager is prone to personal biases and pitfalls that can lead to bad decisions. We all carry biases based on our personal experiences. And we can all fall into various traps that lead to decisions that seem perfectly logical at the time but in retrospect, we see that we should have known better.
In the background materials, including Bolland and Fletcher (2012); Kourdi (2003); and Hammond, Keeney, and Raiffa (2008); several specific decision-making biases and pitfalls are discussed. Collectively these are known as cognitive biases. Some of the common pitfalls and biases discussed in these readings include overconfidence bias, confirmation (self-confirming) bias, sunk-cost bias, framing bias, and hindsight bias.
Carefully review all three of these readings and make sure you understand the different types of biases. Then read through the scenarios below and think about what kind of biases are demonstrated in each scenario. For each scenario, carefully explain which specific bias or biases is demonstrated by the decision and what can be done to avoid this bias in the future. Make sure to pick at least one specific bias that you read about for each scenario, and explain your reasoning. Use references to at least one of the three required readings from the background materials in your discussion of each scenario below. Your paper should be 4–5 pages in length:
#1) The Chief Financial Officer (CFO) of a corporation is of the strong belief that marketing is not a good use of the company's money. Someone shows her data from several years ago showing that during a period of high spending on marketing, sales did not go up. She says, “See, I told you marketing is not a good use of our budget!” and cuts the marketing budget to almost zero. Following the cut in the marketing budget, sales also start to drop dramatically. When asked by an employee if the drop in sales is due to the cut in the marketing budget, she says, “No!” and insists there must be a different explanation. What kind of decision-making bias do you think this represents, and why? What steps would you recommend to this CEO to reduce this kind of bias? Support your answer with references to at least one of the three background readings.
#2). A CEO decides that he wants to greatly expand the company's market by purchasing a major rival. This acquisition would double the company's market share. However, several of his top managers warn him that such a purchase would require the company to take out a huge amount of debt to finance this merger, and that many of these large mergers have failed. They also point out that the organizational culture of the other company is very different and that managing this merger would be very difficult. Nonetheless, the CEO insists that he can overcome the odds and plans to go through with the merger. What kind of decision-making bias do you think this represents, and why? What steps should this leader take to avoid this bias? Support your answer with references to at least one of the three background readings.
#3).A CEO wants to purchase a new factory. He is currently deciding between two factories. The owner of Factory A brags that 94% of products produced at the factory are free of defects. The owner of Factory B cautions that his factory has a 5% defect rate but management and staff are working very hard to reduce the rate. The CEO decides to purchase Factory A citing its strong 94% rate of success in producing defect-free products even though Factory B actually has a 95% rate of success. What kind of decision-making bias do you think this represents, and why? What steps should this leader take to avoid this bias?
#4). A CEO of an automobile company decides to introduce a new hybrid vehicle using cutting-edge technology. A huge amount of money is spent in research and development as well as advertising. But when the car is completed sales are very slow and the price has to be cut so low that the company is losing money on every hybrid vehicle sold. She is advised to simply abandon the car to avoid further losses in profits, and focus her energy on selling profitable vehicles. However, she insists it is unwise to abandon the hybrid vehicle given that so much money has already been put into the project. What kind of decision-making bias do you think this represents, and why? What steps should this leader take to avoid this bias? Support your answer with references to at least one of the three background readings.
#5).Conclude the paper with a discussion about which one of the decision-making biases you think is the most dangerous to a leader, and explain your reasoning.
Assignment Expectations
Follow the assignment instructions closely and follow all steps listed in the instructions.
Stay focused on the precise assignment questions; don't go off on tangents or devote a lot of space to summarizing general background materials.
Make sure to cite readings from the background materials page. Rely primarily on the required background readings as your sources of information.
Include both a bibliography and in-text citations. See the Student Guide to Writing a High-Quality .
Decision Making Biases & Pitfalls
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Decision Making Biases and Pitfalls
Humans are prone to biases that cloud their decision-making processes. These biases lead to disastrous effects with far reaching implications. To avoid these common pitfalls and biases, a good leader and decision maker must make rational decisions based on verifiable and credible information. Here below is a detailed analysis of various case studies that feature decisions made by top managers and the likely biases that influenced their decisions.
Scenario I
The CFO is basing her decision on past information to decide whether to fund marketing department or not. Previously, the resources put into marketing did not yield higher expected returns and thus she did not see value in that investment. In a bid to avoid the same problem, she withdrew marketing resources, citing the previous scenario in which marketing did not translate to more sales. Her decision and ignorance to the plummeting sales show she is anchoring bias that stemmed from the previous failed attempt to increase sales.
Anchoring bias blinds the decision-maker with a psychological benchmark that cannot be directly mapped into the current situation CITATION DrE12 \l 1033 (Bolland & Fletcher, 2012). For the CFO, the case she is citing could have had other variables which countered their marketing efforts and did not directly lead to more sales. However, on withdrawal of the marketing funding, sales drop because it cannot counter the market forces. She attempts to justify her decision by citing irrelevant information. Her biases on marketing have stemmed from other issues, but he/she misconstrues a previous case to suit herself.
To avoid anchoring bias, research and wide consultation to validate some decisions is critical. Decisions must be made from verifiable and credible information to avoid subjectivity. Her subjectivity costs the company in its market share and fanning the problem that is stifling the sales.
Scenario two
The CEO is seeking to merge his company with a rival company to reduce competition and increase market share of its products. However, it is apparent that his plan is likely to fail owing to recent failed mergers and obvious different company cultures of the two companies. Company culture will affect the performance of both companies and settling on how to coalesce their efforts to command a bigger market share is likely to cause a lot of friction and hurt their long-term goals. His drive for bigger market share is a misguided attempt to address competition without regard to other factors that could be dwindling their sales. Additionally, his company does not have the required resources to finance the merger.
The CEO is overconfident in his plans despite compelling information showing slim chances of success. His overconfidence to navigate the inherent and imminent challenges associated with his plan are undeniable, but he pegs the future of the companies on his assessment of his abilities to deliver. He believes he has the capacity and ingenuity to steer the company forward. His plan has grave consequences to his company and its shareholders and very slim chances of success. Additionally, he neglects advice regarding his plan since he thinks he can overcome the odds.
To avoid overconfidence bias, an individual must be open to advice and heed the advice CITATION Jer03 \l 1033 (Kourdi, 2003...