Cognitive Bias in Decision Making - Essay Example

Table of Contents Table of Contents Introduction 2 0Anchoring 2 2.0Framing effect 4 3.0Egocentric bias 6 4.0Confirmation bias 8 5.0Bandwagon effect 9 6.0Loss aversion 11 7.0 Selective Perception 12 Conclusion 15 References 17 Introduction Every day decisions are made that are of different magnitude and importance. Making the wrong decisions can be demoralizing for both the decision maker and the business. Wrong decisions can be a result of inadequate information but also the mind of the decision maker can be shaped by receiving various information (Serfas 65). However, even if the information is accurate, it can result in bad decisions as a result of certain propensities that are already present in the mind of the decision maker. These tendencies are referred to as cognitive bias. Cognitive bias constantly violate the ability of decision maker to make a rational decision. Daniel Kahneman asserts that cognitive bias in decision making process is the intuitive preferences that unswervingly violates the rules related to the rational decision (48). Therefore, a cognitive bias takes place when a psychological pattern changes a decision maker’s subjective view of a problem to differ from the reality. So as to understand how this works, John Butler elucidates how the mental life of a decision maker can be described as two agents (39). The agents include system one and system two. In system one, automatic operations take place that is working quickly by applying a little effort and is not enthusiastic to take control of the thoughts. However, system two is able to construct the necessary thoughts and take the necessary thoughts, for instance doing complex computations and reasoning. Notably, more effortful mental activity occurs in system two. The activities in system two are connected to the subjective experience of choice, connections and agency (Serfas 71). 1.0 Anchoring Anchoring refers to the biased judgment of a stimuli that is based on an incentive assessment of another stimulus and an inadequate alteration away from the initial assessment (Kahneman 52). In other words, this means that a previous presented value affects decision makers when they are about to estimate an unidentified quantity, which is closer to the value considered before the estimate. A good example of the anchoring effect in decision-making is how a decision-maker is influenced by price when buying goods from different suppliers. A higher price will influence the decision maker to value the goods higher than what he/she would have done if the price of the goods is lower. Daniel Kahneman claims that any number a decision maker is asked to consider as a possible solution to an estimation problem will predominantly induce an anchoring effect (50). Any numerical judgment that is under uncertainty is the most observed effect of anchoring. However, the effect of anchoring of a judgment does not have to be necessary a numerical one (Serfas 91) but is a common phenomenon. Therefore, every time decision makers form an image on a stimuli while at the same time a stimuli is present, this image is a subject to the anchoring effect. The anchoring effect to decision-making is produced by two different mechanisms. One mechanism occurs in system one while the other mechanism occurs in system two. Anchoring in system one is an automatic manifestation occurring by a priming effect. However, anchoring in system two occurs in the adjustment of conscious activity. In most cases, there is no corresponding subjective experience in anchoring (Kahneman 56). Therefore, this effect is often viewed by decision makers as unbelievable. Notably, anchoring is a case of suggestion since pictures, words or numbers can get decision makers to hear, feel or see something. An illustration of this can be when asking someone if it itches a little on the right arm, which results in that person saying that it is really itching a little. An example in a business environment is when a decision maker is asked about the average price of German cars (Kahneman 78). Notably, the anchor in this example was to make a suggestion of the car brands that Japan produces after the question is asked. The decision maker used a high anchor that is named luxury car brands and a low anchor that names the mass-market cats. By fill in these different brands, the study reveals that the participants that were exposed to high anchor inclined on a high average price of German cars more than the participants who were exposed to low anchor. Therefore, anchoring can be explained by the selective activities of companionable memories (Kahneman 82). So as to eliminate or remove the anchoring effect, it is vital for decision makers activate system two. This can be achieved by searching the memory for arguments that are against the anchor (Butler 58). Therefore, deducing the opposite is a good strategy for decision makers to use to guard themselves against the anchoring effect. Notably, system two working on data that has been retrieved from memory, where an anchor makes it at ease to remember certain data. Therefore, it is very hard to eliminate or reduce anchoring effect, even when system two is activated. 2.0 Framing effect The farming effect in decision-making is observed when the decision maker’s tolerance to risk as implied by the choices they make is dependent on the description of a set of options (Vermeulen and Petru 45). Decision maker’s choices when confronted with identical decision problems framed negatively in terms of losses versus positively in terms of profit often contradict. To elaborate more on framing effect in decision-making, three theories namely cognitive, motivational and formal theories can be used. Prospect theory a sub-theory in formal theory explains the framing effect in decision making in terms of the value function for goods and services as losses and gains from a reference point (Vermeulen and Petru 49). Notably, whether an outcome is viewed as a loss or a gain by the decision maker depends highly on the decision maker’s reference point. This reference point is generally taken to the status quo asset level during the time of the decision-making. The value function produces the preference value that is assigned to the outcome. Moreover, it is concave for losses, concave for gains, and steeper for losses more than it is for gains (Hill and Gareth 52). This function form means that the decision makers are more subtle to losses than they are to gains and they parade weakening marginal sensitivity to both loss and gain. Cognitive theories are premeditated to determine the cognitive processes that are involved when weighing losses and gains. A good example, the fuzzy trace theory suggests that the framing effect is as a result of simplified and superficial processing information (Hill and Gareth 69). To completely evaluate this theory, a Henry Markovits tested mechanisms through which decision makers simplify framing problems by reasoning through a qualitative pattern instead of reasoning in a numerical and problematic patterns. The findings reveal that most decision makers follow the path of greatest simplicity by applying simplification mechanisms in reducing cognitive demands. Motivational theories assert that farming effect is a consequence of hedonic forces, for instance, the wishes and fears of a decision maker (Markovits 63). As per these models, decision makers are noted to assign stronger values to the feelings of displeasure more than to the feelings of pleasure. This disparity upsurges proportionality with the amount of loss or gain that are involved in the decision. Just as prospect theory’s postulation that losses appear larger than equivalent gains, motivational models are highly based on the entitlement that the emotions that are evoked by the loss are generally greater than the emotions evoked by gains. In order to avoid framing effect in the decision-making process, decision makers can reframe the questions and use empathy by assuming in someone else’s perspective. It may seem obvious, but many decision makers do not consider reframing the frame from which they are analyzing a situation they are in. A good example of framing, instead of looking a situation as a choice between program A and B, the decision maker can reframe program A, so that it appears as program C (Markovits 78). This will be done to program B by making it appear as program D. This will help the decision maker get a fuller picture of the choice he/she has to make. Many choices decision makers make implicate another in a situation. Therefore, it is worth it for the decision maker put him/herself in the shoes of another person. This will help the decision maker see the situation as the other person would. This is similar to reframing. However, it is more particular in that it serve to help the decision makers remove themselves a little bit from the decision they have to make. 3.0 Egocentric bias In an organization, the shareholders and the stakeholders mainly rely on the good judgment of their decision makers when it comes to making decisions that are affecting the performance of the organization. However, decision makers are human therefore they are subjected to egocentric bias. Egocentric bias is the tendency of decision makers making systematic errors that are based on thought related factors instead of evidence (Hill and Gareth 98). In other words, egocentric bias is the tendency of the decision makers attributing their triumph and success to their talents and skills, and their failures to the inactions or actions of others and situational factors for Self-fulfilling. To some extent, acknowledging risk necessitates acknowledging vulnerability. Egocentric bias makes decision makers in an organization more likely to acknowledge risks that are related to external situational factors more than their own shortcoming (Cook, Janet, and Yvonne 41). According to Henry Markovits, egocentric bias expressed by decision makers involves the process of overstressing changes between the present and the past so as to make oneself look more competent or worthy than they are (102). According to many research conducted, decision makers are more likely to favor the circumstances that are of beneficial to them than those that favor the people that are around them. Egocentric bias is one of the seven sins of decision makers’ memory, and it reflects the prominent role that is played by self when retrieving or encoding episodic memories. For example, an egocentric bias is displayed when a decision maker in an organization remembers that having more sales than he/she had made in reality. In this example it is clear that this type of bias is profoundly a memory distortion produced by the current beliefs and knowledge, leading the decision maker to recall the past in a Self-negating manner (Cook, Janet, and Yvonne 54). Besides modestly claiming credit for any positive outcome, which might me self-serving bias, decision makers exhibiting egocentric bias also refer to themselves as more than usually responsible for negative outcomes of organization behavior as well. Notably, this last attribute would give the impression to be lacking in megalomania. This may be as a result of the decision maker’s own actions are instantaneously accessible to them than other’s actions. This is a good example of what Henry Markovits refers to the availability heuristic (105). Moreover, egocentric bias influences perceived fairness. Decision-makers in an organization may feel that overpayment to themselves is fair more than overpayment to other workers. Ironically, they may feel that underpayment is unfair to themselves more than underpayment to other workers. This reveals that egocentric bias affects ethical judgments of decision makers to a point where they not only believe that self-interested are preferred but are also an ethically sound way to proceed. In order to curb egocentric bias can use three steps; learn about the self-serving bias, take responsibility and value failure, and find a way to give credit where it is due. By knowing that egocentric bias exist and that they can be lured into its trap can help decision makers avoid it in the future. Failing is the only way decision makers learn and grow. Therefore, decision makers should take pride in their failures and use them as an opportunity to adapt and learn (Cook, Janet, and Yvonne 68). Decision makers should start accepting that failure is not a result of someone else but their own. Lastly, to avoid egocentric bias, decision makers can help others succeed in a genuine manner. By giving other people an opportunity to shine builds the good working relationship in an organization. 4.0 Confirmation bias Confirmation bias refers to the tendency of a decision makers misinterpreting new pieces of evidence as confirming their previously help hypothesis leading to incorrect decisions (Brest and Linda 63). Just like anchoring and framing effect, confirmation bias leads to non-optimal behavior. Moreover, confirmation bias in decision-making processes often results from ignoring inconsistent information and is largely unintentional. The existing beliefs in a decision maker can include one’s expectations in a given situation and the predictions they have about a specific outcome. Decision makers are more likely to process information to support their own hypothesis or belief when the issue is highly self-relevant or important. Many factors of which decision makers are unaware of influence their information processing. In fact, most decision makers unknowingly prefer information that affirms what they already believe. Confirmation bias lives up to expectations unobtrusively, some would say deceptively, inside the brains of decision makers as they dont look for anything more than to settle on the best conceivable choices with the organization’s money. Indeed, even the decision makers who invest as much energy investigating the cons as they do the pros of a given investment, confirmation bias traps the brain into giving more weight or belief to the experts, if there is as of now a previously established inclination for it (Brest and Linda 65). On the other hand, all the more clearly, it basically permits us to reject or rebate data that doesnt fit in with our convictions. That is an extremely perilous mentality when the organization’s money is in question. Confirmation bias is not always bad for decision makers. Notably, it can be a useful tool on some occasions during the decision-making process, but in most cases is a bad thing for decision makers in an organization to have. So as to avoid confirmation bias, it is important for decision makers seek information that is supporting to both sides (Salas and Gary 77). For instance, if a decision maker wants to adopt a certain strategy to increase the sales in the organization, he/she has to look at both the advantages and the disadvantages of the strategy. Moreover, he/she has to seek to validate and verify every bit of information he/she found in the strategy. Every decision maker has to have their own crap detector. If a decision maker has confirmation bias, he/she will end up utilizing the crap in justifying their own expectation. The resultant effect will be a disaster to the organization. 5.0 Bandwagon effect Bandwagon effect refers to a phenomenon whereby a decision maker will make a certain decision primarily because other decision makers are doing the same, regardless of their beliefs that they override or ignore. Truly, a bandwagon is a wagon that conveys the band in a parade, carnival or other stimulation. The expression "hop on the bandwagon” initially showed up in American legislative issues in 1848 when Dan Rice, a renowned and prevalent bazaar comedian of the time, utilized his fleeting trend and its music to pick up consideration for his political battle appearances. As his battle got to be more effective, different legislators made progress toward a seat on the bandwagon, wanting to be connected with his prosperity. Later, amid the season of William Jennings Bryans 1900 presidential battle, fleeting trends had ended up standard in battles, and "bounce on the bandwagon” was utilized as a harsh term, inferring that individuals were partner themselves with the accomplishment without considering what they related themselves with (Niu, Jie and Guangquan 51). The bandwagon impact is a type of mindless conformity in social brain research. The general tenet is that direct or convictions spread among individuals, as trends and patterns do, with the likelihood of any individual receiving it. As more individuals come to have confidence in something, others additionally "hop on the fleeting trend" paying little heed to the basic confirmation. The propensity to take after the activities or convictions of others can happen in light of the fact that people straightforwardly like to adjust, or on the grounds that people get data from others. Both clarifications have been utilized for confirmation of congruity as a part of mental investigations (Niu, Jie and Guangquan 57). At the point when people settle on objective decisions in light of the data they get from others, financial specialists have recommended that data falls can rapidly frame in which individuals choose to take after the conduct of others. Falls clarify why conduct is delicate individuals comprehend that they are in light of extremely constrained data. Accordingly, crazes shape effortlessly but at the same time are effectively removed. Such educational impacts have been utilized to clarify business bandwagon. The trepidation of being allowed to sit unbothered is one of the principle reasons why one has a tendency to adjust to the greater part. Trepidation reasons individuals to hop the bandwagon; along these lines, apprehension goes about as one of the greatest stimulants for the fleeting trend impact to move on. On the off chance that our brain is not blurred by apprehension, we have a tendency to think obviously and legitimately. We are more averse to tail others aimlessly if our choices are in light of legitimate deduction. Individuals who bounce the fleeting trend have a tendency to override their own particular convictions for the sole purpose of achieving an aggregate concurrence on a specific issue. This is done regardless of the possibility that that individual discovers the aggregate decision to be wrong. 6.0 Loss aversion Losses increasingly pose a threat than gains that individuals credit more noteworthy worth to a given thing when they surrender it than when they secure it. This has been indicated most clearly in bets in which picks up, and Losses can be all the while considered and in the riskless decision in which there is a complexity in the middle of purchasing and offering. On the other hand, loss aversion does not just imply that individuals are unwilling to losses; truth be told, "losses" means something naturally aversive, generally as "addition" indicates engaging quality. Another vital part of Loss aversion is reference reliance. Without reference reliance, the idea of losses increasingly posing a threat than increases may not have had such a profound effect on brain research and financial aspects, in light of the fact that specialists have since a long time ago proposed unavoidable losses over the full scope of most utility capacities. For instance, Niu, Li, Jie Lu, and Guangquan Zhang contend that for all intents and purposes each of the one-dimensional attributes display consistent losses. Consequently, a piece of bread to a starving individual is to a great degree important, however, the incremental worth of progressive pieces positively decreases. Reference-subordinate loss aversion indicates that losses as for a current blessing increasingly pose a threat than additions. The basic viewpoint is that nearby Loss aversion is more convincing than general unavoidable losses (Gupta, Guisseppi, and Manuel 65). The ramifications of stronger loss aversion concerning a current gift is that the utility of a decent, as opposed to being spoken to by a ceaseless utility capacity over the whole scope of a property, must be spoken to by a few bends, one for every reference level. Such numerous utility bends produce inclination inversions through what may be viewed as a normatively immaterial move at the reference point. Loss aversion additionally clarifies a standout amongst the most widely recognized contributing slip-ups: financial specialists assessing their stock portfolio are destined to offer stocks that have expanded in worth. Tragically, this implies that they wind up clutching their devaluing stocks. Over the long haul, this methodology is exceedingly silly, since it at last prompts a portfolio made altogether out of shares that are losing money (Smith and Gavriel 99). Even proficient decision makers are powerless against this inclination and have a tendency to hold losing stocks twice the length winning stocks. Why do speculators do this? Since they are reluctant to take a loss it feels bad and offering imparts that have diminished in worth makes the loss aversion. We attempt to put off the torment as far as might be feasible. The final result is more loss 7.0 Selective Perception Selective perception is a methodology by which people sort out and translate their tactile impressions with a specific end goal to offer intending to their surroundings. Observations vary depending whether we think the conduct is brought about by the individual or the circumstance. Attribution hypothesis expresses that an interior or outside attribution relies on upon uniqueness (whether an individual presentations distinctive practices in diverse circumstances), agreement (whether everybody who is confronted with a comparable circumstance reacts in the same way), and consistency (whether an individual reacts the same route over the long haul). Essential attribution lapse happens when we credit poor execution to inward elements instead of situational imperatives (Staw and Roderick 77). Correspondingly, the self-serving inclination is when people ascribe victories to inside variables, for example, their knowledge or resourcefulness, and disappointments to outside components like misfortune or uncooperative associates. People frequently utilize easy routes in decision-making and these alternate ways can bring about huge twists. These alternate ways incorporate specific recognition, the corona impact, complexity impacts, projection and stereotyping. Specific recognition happens when we just process data that is adjusted to our mentality, intrigues, and foundations. At the end of the day, we decide to see what we need to see. The corona impact happens when a solitary trademark, say engaging quality, shapes the premise for a general impression of somebody. Case in point, in the event that somebody is appealing we may relate he/she has an exhibit of unassociated characteristics: friendliness, insight, promotability (Staw and Roderick 83). Difference impacts happen on the grounds that we dont assess an individual in detachment; our response is impacted by different persons we have as of late experienced. Case in point if one has normal abilities and is assessed in a gathering which incorporates somebody who is stellar, the normal aptitude set may look poor by examination. Stereotyping is the point at which we utilize decision-making easy routes to draw general determinations about an individual or gathering. There are numerous utilizations of recognition hypothesis in the association, including livelihood meetings and execution desires. Selective perception is a real impact on the meeting process and can seriously disable the viability of decision-making (Hodgkinson and William 61). Studies have demonstrated that questioners have a tendency to settle on choices right on time in the meeting methodology and distinctive questioners frequently see hopefuls in an unexpected way. In assessing the execution of workers, speculations spare time, however regularly keep us from precisely seeing the person. Invocation settings, what a director anticipates from a subordinate can modify real execution. The marvel is termed a self-satisfying prediction or Pygmalion impact. At last, discernment likewise has a real effect on the execution assessment process. People in associations decide, settling on decisions among two or more choices. Seeing how supervisors settle on decisions can enhance decision adequacy. The initial phase of settling on a choice is distinguishing proof of the issue, an inconsistency between the present and craved conditions. Normal decision-making is a model got from financial aspects, in which people wish to settle on choices that expand esteem. Ventures in the balanced decision making model incorporate (1) distinguishing the issue; (2) recognizing the decision criteria; (3) weighting the already recognized criteria; (4) producing conceivable decisions; (5) rating every option on every rule; (6) processing the ideal choices (Hodgkinson and William 76). The discerning decision-making model makes various presumptions, including complete data, the absence of predisposition, and most extreme result. Natural decision-making is a process that happens unwittingly. It is the amassing of refined experience that shows as a "hunch." There is a developing acknowledgment that natural decision-making can be a true blue option in specific circumstances (Delgado, Elizabeth, and Trevor 100). Managers regularly make slips. The absolute most regular lapses incorporate arrogance predisposition, securing inclination, affirmation inclination, and accessibility predisposition, acceleration of duty, haphazardness slip, victors condemnation, and insight into the past predisposition. Singular contrasts can affect the way people see and assess data. Identity plainly impacts decision-making, especially regarding honesty and self-regard. There are additionally sex related contrasts in choice making – ladies have a tendency to invest more energy assessing a decision than do men. Various authoritative elements, including execution assessments, reward frameworks, formal regulations, and framework forced time requirements and recorded points of reference will impact decision-making procedures. Three moral criteria can be utilized when deciding: utilitarianism, the rights view, and the equity view. The objective of utilitarianism is to give the best great to the best number of individuals (Delgado, Elizabeth, and Trevor 104). This view has a tendency to rule business decision-making, as it is reliable with objectives of proficiency, profitability, and high benefits. The rights center stresses decision-making that regards and secures the privileges of people, including the rights to protection, free discourse, and due methodology. Conversely, the equity center depends on reasonably and fair-mindedly applying guidelines trying to convey impartially advantages and expenses. Each of these decision criteria has favorable circumstances and expenses that must be deliberately considered. Innovativeness, or the capacity to deliver novel and valuable thoughts, comprises of aptitude, innovative speculation abilities, and inherent errand inspiration. The probability for inventiveness is upgraded when people work in situations that give stream of thoughts, reasonable and helpful judgment of thoughts, prizes for inventive work, adequate budgetary, material, and data assets, flexibility, to choose what work is to be done and how to do it, a manager who conveys adequately, demonstrates trust in others, and backings the work gathering, and work bunch individuals who bolster and trust one another. Conclusion Cognitive bias in decision making is characterized as the tendency to take actions and make decisions based on limited acquisitions and processing information based on overconfidence, attachment to past experience, and self-interest. Evidently, cognitive bias results to perceptual blindness, illogical interpretation, distortion, irrationality, inaccurate judgment, and bad decision. The result of decisions that have been influenced by cognitive bias range from unexciting to the lasting disastrous. Every day decisions are made that are of different magnitude and importance. In an organization, the shareholders and the stakeholders mainly rely on the good judgment of their decision makers when it comes to making decisions that are affecting the performance of the organization. Making the wrong decisions can be demoralizing for both the decision maker and the business. Wrong decisions can be a result of inadequate information but also the mind of the decision maker can be shaped by receiving various information. Decision makers should start accepting that failure is not a result of someone else but their own. Cognitive bias constantly violate the ability of decision maker to make a rational decision. Cognitive bias in decision making process is the intuitive preferences that unswervingly violates the rules related to the rational decision. Therefore, a cognitive bias takes place when a psychological pattern changes a decision maker’s subjective view of a problem to differ from the reality. References Brest, Paul, and Linda H. Krieger. Problem Solving, Decision Making, and Professional Judgment: A Guide for Lawyers and Policymakers. Oxford: Oxford University Press, 2010. Print. Butler, John E. Opportunity Identification and Entrepreneurial Behavior. Greenwich, Conn: Information Age Publ, 2004. Print. Cook, Malcolm, Janet M. Noyes, and Yvonne Masakowski. Decision Making in Complex Environments. Aldershot, England: Ashgate, 2007. Delgado, Mauricio R, Elizabeth A. Phelps, and Trevor W. Robbins. Decision Making, Affect, and Learning: Attention and Performance Xxiii. Oxford: Oxford University Press, 2011. Print. Gupta, Jatinder N. D, Guisseppi A. Forgionne, and Manuel Mora. Intelligent Decision-Making Support Systems: Foundations, Applications, and Challenges. London: Springer, 2006. Hill, Charles W. L, and Gareth R. Jones. 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