Prof Jill Klein Forum Presentation
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Transcript of Prof Jill Klein Forum Presentation
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7/31/2019 Prof Jill Klein Forum Presentation
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IMPROVING YOUR
JUDGMENT
Professor Jill KleinMelbourne Business School
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Why Good Decisions Are Hard
Our brains developed to make hunter-gathererdecisions that enhanced survival.
In the modern world this leads to systematicmistakes in decisions, management and
leadership.
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Hope
Cognitive and social psychologists have worked foryears to understand these problems
New scientific knowledge allows us to pinpoint our
deficiencies and uncover remedies
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COGNITIVE BIASES
OverconfidenceFramingAnchoringConfirmation
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For each of the following ten items, provide a low and high guess such that you are 90 percent sure
the correct answer falls between the two. Your challenge is to be neither too narrow (i.e., overconfident)nor too wide (i.e., under confident).
If you successfully meet this challenge you should have 10 percent misses that is, exactly one miss.
Low High
1. What is the weight of an empty Airbus A340-600 (in kilograms or tons?)2. In what year did John Steinbeck win the Nobel Prize for literature?
3. What is the distance (in kilometers or miles) from the Earth to the Moon?
4. What is the air distance (in kilometers or miles) from Madrid to Baghdad?
5. In what year was the construction of the Roman Coliseum completed?
6. What is the height (in meters or feet) of the Aswan High Dam?
7. In what year did Magellans crew complete the first naval circumnavigation of the globe?
8. In what year was Mohandas K. Gandhi born?
9. What is the surface area (in square kilometers or miles) of the Mediterranean Sea?
10. What is the gestation period of the great blue whale?
* Winning Decisions, by Russo and Schoemaker (2002)
90% Confidence Range
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Overconfidence
Having a greater degree of confidence inones knowledge, forecasts, etc. than is
justified Thinking you will be correct more often than you
are
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Overconfidence: Robust Finding
Study of 2000 managers around the world Less than 1% got only 1 wrong
Most miss 4 7 questions
No strong cross-cultural differences
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Overconfidence
Percentage of Misses
Type of PeopleTested
Types of Questions AskedIdeal
TargetActually
Observed
Harvard MBAs Trivia Facts 2% 46%
Employees of aChemicalCompany
Chemical Industry Facts 10% 50%
Company-Specific Facts 50% 79%
Managers of aComputerCompany
General Business Facts 5% 80%
Company-Specific Facts 5% 58%
PhysiciansProbability that a Patient hasPneumonia
0-20% 82%
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Overconfidence
82% of people say they are in the top 30% of safe drivers
86% of Harvard Business School MBAs say they are betterlooking than their classmates
68% of lawyers in civil cases believe that their side willprevail
Project management Almost all cost estimates for construction projects
exceed initial estimates by at least 20% (the medianis 100%)
Overconfident to finish on time Final Offer Arbitration
70% of bidders believe that their bid will be preferredby the arbiter
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Why Are We So
Over Confident?- Discuss at Tables- Come up with 2-3 reasons
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Overconfidence Among Experts
There is no correlation between how confident a person is(or how confident he or she appears to be)
and accuracy.
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Overconfidence Bias:
Remedies
Average judgment of a group is almostalways better than an individual judgmentThe Wisdom of Crowds
Collect other opinions Averaging even 1 other option with yours
is an improvement
Averaging even your own 2nd opinion withyour 1st opinion is an improvement
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Overconfidence Bias:
Remedies
Think about extremes before the middle Separate deciding from doing
Be a realistwhen deciding; confine optimism toimplementation
Be contrarian Ask yourself why might I be wrong?
Dont demand high confidence and narrow intervalsfrom others
Try to better calibrate your metaknowledge Practice and look for feedback
Keep a decision-diary
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Decision Diary
DateDecision to
be MadeDecision
ProcessUsed
Definitionof Success
Date forEvaluation
Evaluation Learnings
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COGNITIVE BIASES
OverconfidenceFramingAnchoringConfirmation
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Framing
A story is told about two monks who were heavysmokers. Concerned that smoking was inconsistent withtheir commitment to a life of prayer and devotion, theydecided to ask their prefect for guidance. The first asked,Father, would it be permitted to smoke while I am
praying to the Lord?
The answer was a resounding no.
The second asked, Father, when in moments of weakness Ismoke, would it be permitted to say a prayer to theLord?
Yes, the prefect replied, of course!
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Framing
Frames draw attention to certainaspects of a problem, while leavingothers in the shadows, hidden
from our view Mindset or mental model: simplifies
our understanding of a complexreality
But can limit our view and theoptions we consider
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You are the CEO of a Fortune 500 company faced with a difficult choice. Due to structural
changes in the economy that seem irreversible, one of the divisions of your company is
threatened with a partial, and possibly a complete, shutdown. This division currently employs6000 workers. Your staff has identified two options. Option A entails a partial shutdown and the
permanent layoff of some of the workers. Option B entails taking a gamble that will result in
either 0 or 6000 jobs. Specifically, the two options are as follows:
Version 2Option A : exactly 4000 jobs lost.Option B : 1/3 probability 0f no jobs lost and a 2/3 probability 6000
jobs lost.
A: 55%
B: 45%
Version 1Option A : exactly 2000 jobs saved.Option B : 1/3 probability 6000 jobs saved and a 2/3
probability 0f no jobs saved.
A: 86%
B: 14%
Facing gains,so risk averse
Facing losses,so risk seeking
Tested all over the world similar results
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Examples of Framing: Dan Ariely
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Frame Dependence Remedies:Awareness
What issues does the frame address most?
What boundaries do I put on the problem? In particular, what aspects of thesituation do I leave out of consideration?
What yardsticks and reference points do I use to measure success?
What metaphors, if any, do I use in thinking about this issue? (football, war,family)
Why do I think about this question this way? What training or experiences framethe way I view the world?
What does the frame emphasize or minimize?
Do other people in my profession or industry think abut this problem differently?How? Why? Are their frames successful?
* Winning Decisions, by Russo and Schoemaker (2002)
d d
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Frame Dependence Remedies:Falsify Frame
Try to falsify your frame
Role play devils advocate
A sale is atransaction
A sale is part of
relationshipmanagement
A negotiation is winor lose
A negotiation can bewin-win
d d
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Frame Dependence Remedies:Find or Build Better Frames
Talk to someone with different training orbackground or from a different industry
Ask How do you see it? What am Ioverlooking?
Pharma moving to OTC brought in people fromP&G
Talk to other stakeholders (suppliers,customers)
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What frames affect decisions where
you work?What remedies could you use?
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COGNITIVE BIASES
Overconfidence
FramingAnchoringConfirmation
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An initial starting point has anundue influence on our judgment
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Anchoring Bias
Version 1
What is your best guessof the annual Australianegg production (inmillions)?
____________
Version 2
What is your best guess
of the annual Australianegg production (inbillions)?____________
Mean:2018 m
2.0billion
Mean:41.2 billion
What units do you do your budgeting in?
Euro/USD exchangeabove or below .6
.68
Euro/USD exchangeabove or below 1.6
1.5
Actual production:
2.44 Billion
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Anchored to a Random Number
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Anchoring Bias
Often observed in
Project Completion Time Estimates
Sale Estimates
Budgeting
Resourcing projects
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Anchoring Bias:Remedies
Be aware of the anchor you may be using
Try multiple anchors
Most recent similar project completion time
Average of last 10 projects
An optimistic forecast (nothing goes wrong)
A pessimistic forecast (everything goes wrong)
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How might anchors affect thevaluation decisions that you make
at work?
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COGNITIVE BIASES
Overconfidence
FramingAnchoringConfirmation
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Confirmatory Bias:Confirming Expectations
Rich Hannah
Poor HannahGradeLevel
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Confirmation bias
Preference for information that isconsistent with beliefs rather thaninformation that goes against beliefs
More likely to draw conclusions that suggest
Positive outcomes
Support for pre-existing beliefs
Confirm status and success
Also referred to as motivated reasoning
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Remedies
Similar to overconfidence remedies
Generate alternative hypotheses
Look for both confirming and disconfirmingevidence
At least temporarily, pretend others are right(even if you dont think they are)
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Further Reading