Online midterm exam, 120 min.
HULT International Business School Behavioral Econ. & Decision Making Judgment in Managerial Decision Making Bazerman & Moore: Chapters 4, 5, 6 Nils Olsen, PhD 17 June 2021 1Nils Olsen, copyright 2021 2 Chapter 4 Bounded Awareness Nils Olsen, copyright 2021 • Bounded Rationality Nobel Prize Winner, Herbert Simon (March & Simon, 1958; Simon, 1957) à individual judgment is bounded in its rationality; we can better understand decision making by describing what’s actually occurring. • The Rational Model prescribes how decisions ought to be made, given full knowledge of parameters, etc. Behavioral economics describes how decisions are made. Nils Olsen, copyright 2021 3 • Bernard Madoff Stealing from investors: By 2008, confessed to crime (elaborate Ponzi scheme) = $64.8 billion $ was sent via ‘feeder funds’ (earned small % of funds invested + 20% of any returns) Not noticing the obvious: • level of returns & stability (which are impossible) • hints of problems (lacked motivation to investigate) • Investors, government regulators, investment bankers – not aware 4Nils Olsen, copyright 2021 Bounded Awareness • Filtering To navigate this “one great buzzing, blooming confusion” (William James, 1890, p. 488), we constantly filter (cognitively, from birth): neglecting useful information paying attention to irrelevant information (Bazerman & Chugh, 2005) - unconscious - automatic - inefficient 5Nils Olsen, copyright 2021 Bounded Awareness • Inefficient Filtering ‘Without lifting your pencil, draw (only) 4 lines that connect all nine dots” (Bazerman & Moore, 2013) . . . . . . . . . 6Nils Olsen, copyright 2021 Bounded Awareness • Inattentional Blindness ‘Basketball Passes Demo’: Counting # of passes by one team = correctly noticing woman with open umbrella only 21% of time (Neisser, 1979) Replications à person in gorilla costume among basketball players = similar effect (Simons & Chabris, 1999; Chabris & Simons, 2010) Applications: - airline pilots - auto drivers (cell phone) (Levy, Pashler, & Boer, 2006) - surgeons - financial management executives 7 Nils Olsen, copyright 2021 Bounded Awareness Bounded Awareness – Change Blindness • “Change blindness at the Harvard University Institute of Politics” 20 August 2015 Nils Olsen, copyright 2021 8 Nils Olsen, copyright 2021 9 Bounded Awareness – Change Blindness • Apollo Robbins NBC TODAY, 6 February 2013 “Supernatural pickpocketing skills” Nils Olsen, copyright 2021 10 Change Blindness à Apollo Robbins, “The gentleman thief” • Change Blindness Failing to notice obvious changes in one’s physical environment (Simons, 2000) Applications: - legal - medical - business In business, and when it comes to unethical behavior, many small steps (vs. one large step) often more easily accepted (a la Gino & Bazerman, 2009) 12Nils Olsen, copyright 2021 Bounded Awareness • Focalism & Focusing Illusion (Wilson, Wheatley, Meyers, Gilbert, & Axsom, 2000) • Focusing Illusion – tendency to make judgments based on only subset of available information (overweighting the subset of information … and underweighting the unattended information) e.g., ‘Medical Prognosis’ (cause of medical issue): When Medical Doctors assessing probabilities of 4 mutually exclusive prognoses for patients … à total of 4 prognoses > 100% (Tversky & Koehler, 1994) 13 Nils Olsen, copyright 2021 Bounded Awareness • Bounded Awareness in Groups awareness of groups can be bounded by information coming from a group discussion Groups focus more on shared data (that group already has) versus unique data (unshared, and known by only one person) (Stasser, 1988; Stasser & Stewart, 1992; Stasser & Titus, 1985; Gruenfeld, Mannix, Williams, & Neale, 1996) e.g., Selecting one of three candidates: As individuals, 67% chose candidate A *** vs *** when individuals combined into groups, 83% chose candidate A (Stasser & Titus, 1985) 14Nils Olsen, copyright 2021 Bounded Awareness • Monty Hall Game Named after Monty Hall, host of “Let’s make a deal”. Once people select one option … and host reveals one other option (showing small prize) – then giving player option to switch choice – many people do not switch choice (mistakingly think: 50% / 50% chance of getting large prize); It’s actually 33% / 33% / 33% Optimal move à ALWAYS switch choices (doubling probability of getting large prize) 15Nils Olsen, copyright 2021 Bounded Awareness Mood & Vigilance of Processing Slightly NEGATIVE mood = more precise, more vigilant (careful) processing of cognitive information There are limits: Extreme negative mood = sub-optimal (not ideal) for information processing 16Nils Olsen, copyright 2021 17 Chapter 5 Framing & Preference Reversals a few key points … Nils Olsen, copyright 2021 Nils Olsen, copyright 2021 18 – cognitive bias Within preference reversals, a person decides on a choice either within the context of a bundle of options, or as distinct (separate, non-bundled) options where some of the options lean in the positive direction and others lean in the negative direction (essentially presented as either a loss or gain – with respect to money, time, energy expended, etc). e.g., CHOICE (focus on probability) … vs. … BIDS (focus on amounts)) Preference Reversal Nils Olsen, copyright 2021 19 Framing Effect – is a type of cognitive bias. Within framing, a person decides on a choice within a set of options, where some of the options lean in the positive direction and others lean in the negative direction (essentially presented as either a loss or gain – with respect to money, time, energy expended, etc). Framing Effects Prospect Theory Nils Olsen, copyright 2021 20 Nils Olsen, copyright 2021 21 Prospect Theory – the idea that “losses loom larger than gains” (Kahneman & Tversky). A dollar lost is more debilitating than a dollar gained is exhilarating. When options are framed in terms of “gains” people tend to be risk-averse (e.g., sell to early) … whereas when options are framed as “losses”, people tend to be risk-seeking (e.g., hold on to the option, and “sell” too late) Framing Effect Prospect Theory (Kahneman & Tversky, 1979 & 1992) * Nobel Prize in Economics (2002) * Theory Created in 1979, & developed in 1992 * ‘Losses loom larger than gains’ * Risk-averse on gain function (sell to early); Risk-seeking on loss function (hold too long). Nils Olsen, copyright 2021 22 Chapter 6 Motivational & Emotional Factors Nils Olsen, copyright 2021 23 • “Footbridge Dilemma” (Foot, 1978): utilitarian approach: “doing the greatest good for the greatest number of people” • Trolley Problem • https://www.youtube.com/watch?v=bOpf6KcWYyw deontological approach (Kant, 1964): morality of an action based on the the action’s adherence to rules and/or duties • Kant’s Deontological Approach to Ethics • https://www.youtube.com/watch?v=x_uUEaeqFog Nils Olsen, copyright 2021 Ethical Dilemmas 24 https://www.youtube.com/watch?v=bOpf6KcWYyw https://www.youtube.com/watch?v=x_uUEaeqFog • ‘Want versus Should’ Homer’s The Odyssey: Ulysses – knowing that his sea faring crew would soon encounter the Sirens (mythical female enchanters luring sailors to remote islands). Ulysses instructed crew to block ears to avoid being lured by the songs – and tie him with ropes to the boat’s mast so that he would not be tempted by the songs. His plan worked. • How often are people faced with the battle between what we want to do and what we should do? Nils Olsen, copyright 2021 Emotion & Cognition - Collide 25 • ‘Want vs. Should’ Managing Short-Term Temptations to Achieve Long-Term Gains : There are multi-million dollar businesses devoted to motivating individuals to avoid temptations and approach goals • e.g., *financial stability *investment strategies *exercise (to think clearly) Nils Olsen, copyright 2021 Emotion & Cognition - Collide 26 • Multiple Selves e.g., spending vs. saving (Loewenstein, 1996) Temporal Differences e.g., Discounting à occurs when having something now perceived as more valuable than having in future vs. saving (financial) (Loewenstein, 1996) Nils Olsen, copyright 2021 Emotion & Cognition - Collide 27 The delicate nature of our memory … Check out this demo. (customized for you) Nils Olsen, copyright 2021 28 Nils Olsen, copyright 2021 List 1 (% correct) List 2 (% correct) List 3 (% correct) List 4 (% correct) Overall % gravel 0.96 dream 0.94 fur 0.81 stool 0.82 0.89 road 0.75 drowse 0.72 quilt 0.68 upholstery 0.83 0.78 sand 0.68 rest 0.59 spongy 0.67 cushion 0.63 0.71 smooth 0.48 snore 0.52 tender 0.24 rung 0.58 0.56 edge 0.57 doze 0.33 satin 0.74 bench 0.48 0.54 coarse 0.64 wake 0.47 subdued 0.35 rocker 0.48 0.48 jagged 0.55 yawn 0.45 felt 0.22 wicker 0.47 0.43 rugged 0.67 nap 0.58 fluffy 0.41 relax 0.56 0.47 uneven 0.43 insomnia 0.59 blanket 0.53 sit 0.55 0.52 pebbles 0.74 bed 0.68 soothing 0.28 table 0.62 0.48 callous 0.79 pillow 0.59 hard 0.58 sofa 0.52 0.56 sandpaper 0.42 awaken 0.58 cotton 0.74 couch 0.81 0.70 harsh 0.67 comfort 0.48 downy 0.81 swivel 0.52 0.54 tough 0.79 peace 0.57 velvet 0.47 cozy 0.67 0.50 gentle 0.61 slumber 0.45 silk 0.72 desk 0.73 0.55 bumpy 78 awake 0.72 mattress 0.64 seat 0.68 0.70 rough 0.45 sleep 0.48 soft 0.20 chair 0.31 0.39 False Memory Effect (Data collected by Nils Olsen (2021) replication of: Roediger & McDermott, 1995) 29 • Links to Decision Making: Above is table of data for false memory demonstration (that we ran in class). Table shows proportion of correct recalls for each word in each of four word-lists. Last column (farthest to right) shows average across all four lists. Words in each list are listed in the order (from 1 to 16) in which they were presented (as Nils read them). Row of proportions at bottom of table (in bold) contains the data for the "lure" -- or critical (yet not presented) word for each list. Amazingly these “lure” (decoy) words are recalled as often (even more often) than many of the words that were actually presented from the lists! Nils Olsen, copyright 2021 False Memory Effect (Data collected by Nils Olsen (2021) replication of: