This sort of things is going on in loads of different … Their decisions about whether to settle a claim or take it to court usually hinge on their assessments of the possible outcomes of a trial. Bad decisions can damage a business and a career, sometimes irreparably. Their different reactions result from the different reference points presented in the two frames. Better yet, build the counterarguments yourself. Is the population of Turkey greater than 35 million? You may find that elements of the current situation act as barriers to your goals. In their 2006 Harvard Business Review Article, “The Hidden Traps in Decision Making,” John S. Hammond, Ralph L. Keeney and Howard Raiffa offer a series of common psychological traps that affect the way people make decisions. Each state gave drivers a new option: by accepting a limited right to sue, they could lower their premiums. But there’s another set of traps that can have a particularly distorting effect in uncertain situations because they cloud our ability to assess probabilities. Many people would first say, “Okay, where’s the stock today?” Then, based on where the stock is today, they will make an assumption about where it’s going to be in three months. Think through your position before any negotiation begins in order to avoid being anchored by the other party’s initial proposal. In t his scenario, due to anchoring bias, ... An example from Claude Hopkins. Copyright © 2020 Harvard Business School Publishing. Identify other options and use them as counterbalances, carefully evaluating all the pluses and minuses. 2. But executives can also take other simple steps to protect themselves and their organizations from these mental lapses. What’s your best estimate?” Researchers asked this question to a group of people, and the estimates were seldom too far off 35 million. If you are like 71% of the respondents in the study, you chose the “less risky” Plan A, which will save one barge for sure. The clearer an object appears, the closer we judge it to be. Be honest with yourself about your motives. Bargaining is based on it. Although it would be a straightforward, inexpensive proposition to sell those shares and put the money into a different investment, a surprising number of people don’t sell. At every stage of the decision-making process, misperceptions, biases, and other tricks of the mind can influence the choices we make. First impressions are quick. When considering a decision, the mind gives disproportionate weight to the first information it receives. Most of us have fallen into this trap. More people will, for instance, choose the status quo when there are two alternatives to it rather than one: A and B instead of just A. Frequently, it’s because they are unwilling, consciously or not, to admit to a mistake. Initial Price Setting. The authors describe what managers can do to ensure that their important business decisions are sound and reliable. What do you do? For example, the initial price offered for a used car sets the standard for the rest of the negotiations , so that prices lower than the initial price seem more reasonable even if they are still higher than what the car is really worth. The anchoring trap was explained to them with other examples and its consequences. That’s because we’re constantly making judgments about these variables and getting quick feedback about the accuracy of those judgments. Bad 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. And basically asked them are the chances of this person having lung disease higher or lower than, and then the researcher picked a random probability. But heuristics can be highly fallible. What, after all, did you expect your acquaintance to give, other than a strong argument in favor of her own decision? To reduce insurance costs, two neighboring states, New Jersey and Pennsylvania, made similar changes in their laws. Even in circumstances where analysis is complete and the path forward seems relatively clear, decision-making can be a challenge. What exactly is anchoring in negotiation, and how does it play out at the bargaining table?. Choosing between A and B requires additional effort; selecting the status quo avoids that effort. The original question surrounding the decision you are trying to make has already created an anchor. Psychological traps are easy to fall for when it comes to making business (or any) decisions, says Nicole Widmar, associate professor of agricultural economics at Purdue University. If youre like most people, the figure of 35 million cited in the first question (a figure we chose arbitrarily) influenced your answer to the second question. Recall in the beginning of this series, I suggested the myth in decision making is that a problem, crisis or opportunity can in fact be resolved with a well-timed decision when, in truth, problems are rarely solved and instead merely contained. Decision makers display a strong bias toward alternatives that perpetuate the status quo. In business, a common anchor is a past event or trend. These might seem like silly little experiments that psychologists do to try and suggest that people are idiots, but actually it’s showing us something fundamental about the way we think. At the same time, look for opportunities to use anchors to your own advantage—if you’re the seller, for example, suggest a high, but defensible, price as an opening gambit. Anchoring Trap. Because we frequently base our predictions about future events on our memory of past events, we can be overly influenced by dramatic events—those that leave a strong impression on our memory. Where do bad decisions come from? How might leaders adapt to such significant transitions in order to maintain success? Ask if you’d choose the status quo if it the status quo. The original question surrounding the … For example “Is your budget more or less than $100,000” seems like a simple question, but it definitely sets the anchor. For airline pilots, though, the distortion can be catastrophic. It can highlight sunk costs or lead you toward confirming evidence. Smart Choices: A Practical Guide to Making Better Decisions, John S. Hammond, Ralph L. Keeney, and Howard Raiffa. Anchoring trap. Without fail, the answers to the second question increase by many millions when the larger figure is used in the first question. Anchoring trap. That’s why pilots are trained to use objective measures of distance in addition to their vision. What Is Anchoring Bias? They were then told that they could easily exchange the gift they received for the other gift. But “later” is usually never. Every competitor was promoting its toilet soaps through negatively framed messages. The researchers found that people make insufficient adjustments from an initially presented value (an anchor) when coming to conclusions. But any adverse effect of framing can be limited by taking the following precautions: Most of us are adept at making estimates about time, distance, weight, and volume. Would you accept the chance? When considering a decision, the mind gives disproportionate weight to the first information it receives. One of us helped a major U.S. bank recover after it made many bad loans to foreign businesses. The best way to avoid all the traps is awareness–forewarned is forearmed. The first is our tendency to subconsciously decide what we want to do before we figure out why we want to do it. By, for example, opening the negotiation on a rental contract by stipulating the terms of such a contract, they succeed in defining the mental parameters within which the potential tenant operates. Widmar says the key is to ask yourself, “If I weren’t currently choosing this option, would I choose it from my alternatives?”. If I were to ask you where you think Apple’s stock will be in three months, how would you approach it? Another group in the study, however, was asked to choose between alternatives C and D: Plan C: This plan will result in the loss of two of the three cargoes, worth $400,000. Support your answer with at least one example of how you have experienced this when purchasing a good or service. To avoid the prudence trap, always state your estimates honestly and explain to anyone who will be using them that they have not been adjusted. Try these techniques: Imagine that you’re the president of a successful midsized U.S. manufacturer considering whether to call off a planned plant expansion. The sunk-cost trap inclines us to perpetuate the mistakes of the past. In business, where sins of commission (doing something) tend to be punished much more severely than sins of omission (doing nothing), the status quo holds a particularly strong attraction. The anchoring effect is a cognitive bias that influences you to rely too heavily on the first piece of information you receive. If managers underestimate the high end or overestimate the low end of a crucial variable, they may miss attractive opportunities or expose themselves to far greater risk than they realize. A frame can establish the status quo or introduce an anchor. This trap is the tendency to rely too heavily on the first … Anchoring. For example, if you are in the medical field, using a symptom checklist or assessment can help decrease cognitive bias. But managers who are aware of the dangers of anchors can reduce their impact by using the following techniques: We all like to believe that we make decisions rationally and objectively. Think about the problem on your own before consulting others in order to avoid becoming anchored by their ideas. “Maybe I’ll rethink it later,” they say. According to the author, similar mistakes can be committed in organizations when groupthink is present. The old numbers become anchors, which the forecaster then adjusts based on other factors. Multiple Unit Pricing . More bothersome, we get … Are you really gathering information to help you make a smart choice, or are you just looking for evidence confirming what you think you’d like to do? In addition to reviewing the causes and manifestations of these traps, we offer some specific ways managers can guard against them. Though we can’t get rid of them, we can learn to be alert to them and compensate for them—monitoring our decision making so that our thinking traps don’t cause judgment disasters. Our past decisions become what economists term sunk costs—old investments of time or money that are now irrecoverable. In this final article in the Data-Driven Decision Making in Times of Crisis series, we explore the last stage in the journey to transform data into actionable intelligence, also known as the intelligence cycle. Anchoring can occur when an individual or group latches onto the first information they encounter about a decision. Making business decisions is your most crucial job—and your riskiest. Get someone you respect to play devil’s advocate, to argue against the decision you’re contemplating. For further discussions of decision traps, see: J. Edward Russo and Paul J. H. Schoemaker, Decision Traps: The Ten Barriers to Brilliant Decision Making and How to Overcome Them (New York: Simon & Schuster, 1989) and Max Bazerman, Judgment in Managerial Decision Making (New York: John Wiley & Sons, fourth edition, 1998). When given the Gandhi example we can’t be bothered to make the massive adjustment from the anchor we’re given up to the real value, so we go some way and then stop. The first automobiles, revealingly called “horseless carriages,” looked very much like the buggies they replaced. Decision makers display, for example, a strong bias toward alternatives that perpetuate the status quo. Many mergers, for example, founder because the acquiring company avoids taking swift action to impose a new, more appropriate management structure on the acquired company. One report concluded that the death penalty was effective; the other concluded it was not. Those who had heard the list with the more famous men thought there were more men on the list, while those who had heard the one with the more famous women thought there were more women. What if you were asked this question: Would you prefer to keep your checking account balance of $2,000 or to accept a fifty-fifty chance of having either $1,700 or $2,500 in your account? Each educational program focuses on different business topics and concepts related to the agribusiness industry you serve, including: marketing, sales, finance, talent management and strategy. Negotiations. “Decision traps are built-in flaws in our thinking,” she says. They can be as simple and seemingly innocuous as a comment offered by a colleague or a statistic appearing in the morning newspaper. Without fail, the answers to the second question increase by many millions when the larger figure is used in the first que… On a broad scale, we can see this tendency whenever a radically new product is introduced. Choosing the status quo saves energy. The test contained three questions from which two were important for the experiment: 1. “Don’t seek out one-sided information and advice you know will tilt the decision-making process,” Widmar says. It seems psychologically safer to let him or her stay on, even though that choice only compounds the error. At the same time, use anchors to your own advantage. Researchers have been studying the way our minds function in making decisions for half a century. Through daily practice, our minds become finely calibrated. Howard Raiffa is the Frank Plumpton Ramsey Professor of Managerial Economics Emeritus at the Harvard Business School. “Let’s not rock the boat right now,” the typical reasoning goes. How would you answer these two questions? No one can avoid their influence; they’re just too widespread. Anchoring Bias Can Influence How Much You Are Willing to Pay . But before you put the brakes on the plant expansion, you decide to call up an acquaintance, the chief executive of a similar company that recently mothballed a new factory, to check her reasoning. First of all, remember that in any given decision, maintaining the status quo may indeed be the best choice, but you don’t want to choose it just because it is comfortable. To reduce the effects of overconfidence in making estimates, always start by considering the extremes, the low and high ends of the possible range of values. Once again, the two questions pose the same problem. These routines, known as heuristics, serve us well in most situations. and how they impact both your cash management and your business as a whole: The Anchoring Trap: When making a decision, our minds often give preference to the first information they receive. The first “electronic newspapers” appearing on the World Wide Web looked very much like their print precursors. Below are three examples of the most common decision making traps according to Hammond et al. Too often, the original bankers’ strategy—and loans—ended in failure. In business, a common anchor is a past event or trend. In business, one of the most common types of anchors is a past event or trend. But sometimes the fault lies not in the decision-making process but rather in the mind of the decision maker. For Constructed Response 3, have the students bring in examples of anchoring in print or online media. They find the status quo comfortable, and they avoid taking action that would upset it. In fact, ... Let’s take a look at some everyday anchoring bias examples that may impact your decisions. In this final installment of our series on decision making, we’ll reflect on practical suggestions for improving our effectiveness in decision making. Naturally, then, we are drawn to information that supports our subconscious leanings. While managers continually make such estimates and forecasts, they rarely get clear feedback about their accuracy. Research highlights Anchoring bias is a process whereby people are influenced by specific information given before a judgement. Get actual statistics, not just impressions. But the fact is, we all carry biases, and those biases influence the choices we make. more. While you might expect that about half would have wanted to make the exchange, only one in ten actually did. “Understanding what these traps are and how they affect decision making is critical to understand how people arrive at their conclusions.”. In other words, one factor is considered above all else in the decision-making processes. Plan B: This plan has a one-third probability of saving the cargo on all three barges, worth $600,000, but has a two-thirds probability of saving nothing. There is a great deal of experiments that prove this magnetic attraction to the status quo. In a case involving automobile insurance, for example, framing made a $200 million difference. Others take the form of biases. Be open minded. The way the human brain works can sabotage our decisions. Examine why admitting to an earlier mistake distresses you. Check out our upcoming programs and exceed your professional development goals! This simple mental shortcut helps us to make the continuous stream of distance judgments required to navigate the world. In seeking the advice of others, don’t ask leading questions that invite confirming evidence. Perhaps one of the best examples of the anchoring effect is Black Friday. What makes all these traps so dangerous is their invisibility. Being overly influenced by vivid memories when estimating Example: Lawyers overestimate probability of large awards because the media aggressively publicizes massive awards. Once an anchor is set, other judgements are made by adjusting away from that anchor, and there is a bias toward interpreting other information around the anchor. Remember the wise words of Warren Buffet: “When you find yourself in a hole, the best thing you can do is stop digging.”. Try using alternative starting points and approaches rather than sticking with the first line of thought that occurs to you. Shoppers pour over endless sales ads, map their shopping routes and time their visits all for the chance to receive steep discounts.