Foundations of Management - Week 4 Article: The Hidden Traps in Decision Making
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What are the psychological traps that undermine business decisions?
- Anchor trap
- Status-quo trap
- Sunk-cost trap
- Confirming-evidence trap
- Framing trap
- Estimating and forecasting traps
What is the Anchoring trap?
When the mind gives weight to the first information it sees.
How do you beat the Anchoring trap?
- View a problem from different perspectives
- Think about the decision on your own before consulting others
- Be open-minded
- Try not to anchor others
- Be aware of anchors in negotiations
What is the Status-quo trap?
Biasing ourselves to not take action or try something different in order to protect our egos.
How do you beat the Status-quo trap?
- Remember it's not the only choice
- Ask if you would choose it if it weren't the norm
- Try not to exaggerate what choosing the alternative would be
- Don't choose the status-quo because all other choices are just too overwhelming
What is the sunk-cost trap?
- Making bad decisions because you've made them in the past
- Unwilling to admit past poor decisions
How do you beat the sunk-cost trap?
- Seek advice from people outside the scope of the bad decision from the past
- Examine why admitting to an earlier mistake is difficult
- Look at for the sunk-cost trap in your subordinates
- Don't cultivate a fear of failure
What is the confirming-evidence trap?
Making decisions by seeking out a biased confirmation of the decision you were planning to make while avoiding sources that might contradict
How do you beat the confirming-evidence trap?
- Check that you're examining all evidence equally
- Get someone you respect to argue against you
- Be honest about your own motives
- When seeking advice, don't ask leading questions
What is the framing trap?
Stating a problem in a way that encourages a biased answer
What are the types of framing traps?
- Gains vs losses
- Different reference points
What is the problem with the gains vs losses framing trap?
- People are risk averse when presented with gains
- People are risk seeking when presented with losses
What's the problem with the different reference points framing trap?
- Depending on the reference one alternative could seem better than another.
- $300, $500, $1700, $2500
How can you beat the framing trap?
- Don't automatically accept the frame
- Try reposing the problem in a neutral way
- Examine the way others frame the problem
What are the estimating and forecasting traps?
What is the overconfidence trap?
Being too confident in your estimating abilities
What is the prudence trap?
Estimating unnecessary values to compensate for possible loss or catastrophe
What is the recallability trap?
Basing predictions about future events on our memory of past events
How can you beat the overconfidence trap?
Always consider the extremes and all values inbetween
How can you beat the prudence trap?
State your estimates honestly and explain they have not been adjusted
How can you beat the recallability trap?
Make sure your assumptions are not influenced by your memory
What is the primary way to avoid hidden traps in decision making?
- Be aware of your decisions
What would you like to do?
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