Organizational Behavior 2024_5A1O03
Session 1: Decision making biases
Dr. Lotta Harju
3/1/2024
1.-2. Decision making 6. Leadership
Cognitive biases
2. Group theory Organizational 5. Personality
behavior
3. Motivation and well-being 4. Job design and job crafting
https://app.wooclap.com/PYUMPN
Last year you authorized the expenditure of €500,000 for what you
thought was a promising new project for the company. So far, the
results have been disappointing.
The people running the project say that with an
additional €300,000 and some more time they can turn things
around. Without extra funding, they cry, there is little hope. The
success of this project would be a huge advantage for the company
and, thus, your career.
Do you spend the extra money and risk further losses, or do you cut off
the project and accept the half-million-dollar write-off?
(Adapted from HBR, 1987)
Escalation of commitment
Tendency to commit to a failing course of action
People increase their investment in a decision despite
new evidence suggesting that the decision was
probably wrong. Such investment may include money,
time, or — in the case of military strategy — human
lives
Case WeWork
https://www.youtube.com/watch?v=X2LwIiKhczo
https://www.businessinsider.fr/us/softbank-masayoshi-son-still-loves-and-respects-weworks-adam-neumann-2020-11
Why?
Self-justification theory – was the initial choice a good idea?
• People do not like to admit that they have been wrong
Expectancy theory – are desired outcomes attainable?
• Reasons for failing are not consistent. Therefore the desired
outcome is still possible to attain (with more investment).
Prospect theory – how to avoid losing?
• The bigger the investment the bigger the possible loss.
People are loss averse and so they want to turn things
around
Kahneman & Tversky, 1979; Staw, 1981; Vroom, 1964
How to break escalation of commitment?
ü Monitoring the decisions and setting limits
ü Changing the decision makers
ü Bring in outsiders
ü Beware of tunnel vision
ü Beware of emotions
e.g. Brockner, 1992; Kalmanovich – Cohen et al, 2018
Who would you rather work with?
1 2
Unsplash.com
https://app.wooclap.com/PYUMPN
Who would you rather work with?
1 2
Unsplash.com
Alan: intelligent-industrious-impulsive-critical-stubborn-envious
Ben: envious-stubborn-critical-impulsive-industrious-intelligent
https://app.wooclap.com/PYUMPN
Solomon Asch, 1946
Halo effect
Can be defined as the influence of a global evaluation of individual
attributes of a person
A tendency to allow one's judgment of another person to be unduly
influenced by an unfavorable or favorable first impression based on
appearances or specific characteristics
He benefited from a frenetic, nonstop energy, and silly as it may
sound, there’s no question that Mr. Neumann’s good hair and looks
helped his cause. At 6 feet 5, he had a physical presence that could
dominate a room. – New York Times
https://www.nytimes.com/2019/11/02/business/adam-neumann-wework-exit-package.html
Selective attention
(a.k.a. inattentional blindness)
https://www.youtube.com/watch?v=FWSxSQsspiQ
https://www.youtube.com/watch?v=wBoMjORwA-4
A cognitive bias related to a tendency to notice preferred or expected
stimuli and ignore or forget the stimuli that is emotionally uncomfortable or
that contradicts prior beliefs or expectations.
An inevitable outcome of the need to process overwhelming amount of
information and use that to make complex decisions
Simons & Chabrin, 1999; Simons, Franconeri & Reimer, 2000; Simons & Levin, 1998
Steve Jobs introducing IPad
https://www.youtube.com/watch?v=XjuF-2w0wno
Anchoring effect
A common human tendency to rely too heavily on one trait
or piece of information (even if not relevant) as a point of
reference in your estimation of a problem or a situation.
Individuals adjust their thinking erroneously on the anchor
(e.g., a number) when making decisions.
Tversky & Kahneman, 1974
Take-away
We are not always the rational decision makers we
think. There is systematic error (bias) in the way we
think that affects our decision making.
To ponder: Will algorithms make better decisions?
1.-2. Decision making 6. Leadership
Cognitive biases
• Escalation of commitment
• Halo and anchoring effect
• Selective perception
2. Group theory Organizational 5. Personality
behavior
3. Motivation and well-being 4. Job design and job crafting
Reminder
Go through the introductory materials and the video by Gary
Hamel at BS (Course content -> Decision making) for next time.
Next, get to know your team (or sign up for one if you
have not already)!
Readings
Brockner, J. (1992). The escalation of commitment to a failing course of action: Toward
theoretical progress. Academy of Management Review, 17(1), 39-61.
Kalmanovich-Cohen, H., Pearsall, M. J., & Christian, J. S. (2018). The effects of leadership
change on team escalation of commitment. The Leadership Quarterly, 29(5), 597-608.
Kahneman, DanieI and Amos Tversky. (1979). "Prospect Theory: An Analysis of Decision
Under Risk," Econometrica 47, 263-291.
Simons, D. J., & Chabris, C. F. (1999). Gorillas in our midst: Sustained inattentional
blindness for dynamic events. Perception, 28(9), 1059-1074.
Staw, B. M. (1981). The escalation of commitment to a course of action. Academy of
Management Review, 6(4), 577-587.
Tversky, A., & Kahneman, D. (1974). Judgment under Uncertainty: Heuristics and Biases:
Biases in judgments reveal some heuristics of thinking under
uncertainty. science, 185(4157), 1124-1131.
Vroom, V. H. (1964). Work and motivation. New York: Wiley.
