Judgment in Managerial Decision Making, 8th Edition

CHAPTER THREE

Common Biases

The modern world is a big, complicated, messy place. The number of people, the amount of knowledge, and the degree of complexity are all expanding rapidly. Despite the sophistication of our corporations and the speed of our technological development, the capabilities of the human brain have not changed dramatically in the last ten thousand years. As we noted in Chapter 1, individuals rely on rules of thumb, or heuristics, to lessen the information-processing demands of making decisions. Heuristics reduce the effort people must put into making decisions by allowing them to examine fewer pieces of information, simplify the weights of different information, process less information, and consider fewer alternatives in making decisions (Shah & Oppenheimer, 2008). By providing managers with efficient ways to deal with complex problems, heuristics frequently produce effective decisions. However, heuristics also can lead managers to make systematically biased judgments. Biases result when an individual inappropriately applies a heuristic.

The inappropriate application of heuristics can be difficult to avoid. We often make decisions in contexts that are drastically different from one another, and we may incorrectly apply the same decision processes that we successfully used in the past to a completely different context in the future (Kahneman & Klein, 2009). Furthermore, because we often do not receive clear signals about the quality of our decisions, we may ...