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Common Biases and Judgment Errors in Decision Making

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  • 1:03 Ability-Type Biases
  • 2:30 Information-Type Biases
  • 4:51 Escalation of Commitment Bias
  • 5:15 Randomness Error
  • 5:38 Risk Aversion
  • 6:01 Lesson Summary
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Lesson Transcript
Instructor: Jennifer Lombardo
In order for companies to be successful they have to be able to learn from their mistakes. One way they can do that is to identify biases and errors that might occur during decision-making.

Errors in Decision-Making

Pear Products is a technology firm that makes cool gadgets for consumers. They are responsible for over 10 years of successful product launches and sales profits. Recently, though, the company's stock price has plummeted amidst horrible new product launches and marketing programs. An outside consultant has been hired to try and get Pear Products back on track.

The consultant thinks that Pear Products' woes stem primarily from bad decision-making, so his main job will be to identify common biases and judgment errors in those decisions and figure out recommendations to fix them. Common biases are prejudices or decisions that are not fair and balanced. Judgment errors are business errors or mistakes that occur due to poor decision-making. In other words, biases focus on small bits of information instead of the entire amount, and judgments are based on bad logic and reasoning.

Ability-Type Biases

The consultant was set on discovering why Pear Products was self-destructing and unsuccessful after so many profitable years. First, he found several biases relating to the company and its members' perceived ability. The very first reason for Pear's issues was because upper management was culpable of an overconfidence bias. This is when upper management has a higher confidence of their capabilities and successes than their actual skills and experience will support.

As with most successful companies, Pear Products felt that they were untouchable and that they could slap their pear emblem on any product and it would sell. They were overconfident due to their many years of success. The consultant found that they were not paying attention to new technology startups that were designing more advanced and cooler products. His first recommendation was to get humble quick, and go back to designing unique products that fulfill a consumer need.

The consultant also found that most of Pear's upper management was guilty of hindsight bias, which is when managers falsely believe that they predicted the result of a decision after the outcome is known. It is understandable that since Pear Product's business is plummeting, all of the managers do not want to be blamed for the mistake. Now each manager is reporting to the consultant that they had known the products were poor choices for the market.

Information-Type Bias

The consultant also began to tackle how Pear Products came to decide on what products to develop and found numerous biases relating to how they analyzed information. For instance, he found that they were responsible for anchoring bias in their decision-making. This is when managers rely too heavily on one piece of information in making their final decision.

For example, Pear Products gave the go-ahead to two new phones that had large screens. Consumer research studies showed that people wanted larger screens on their tablets, but not their phones. Pear Products relied on this piece of information to design their new phones without paying attention to the whole thing. The end result was that consumers felt the phones were too large and cumbersome and sales were nonexistent.

Some of the managers were responsible for even more bad decisions. Pear Products' last new product was the release of music streaming software, a feature that some managers in the company heavily supported. In one research study, the team did mention the popularity of music streaming applications. However, the team also ignored numerous trend reports that showed this area was slowing and oversaturated with competitors.

Although research showed that the market was oversaturated with this type of product, the Pear Product team still invested large development costs in this idea. They were guilty of confirmation bias, which is when managers only use data that will confirm their decision. The team spun the facts to support the new product and ended up with a failure. The consultant felt that Pear Products needed an independent research team to make suggestions on new products and eliminate confirmation and anchoring biases.

Finally, the consultant found availability bias, which is when individuals overcompensate for the chance of something occurring because it is a memorable event, making it the first available thing you think of. Pear Products felt that any product with their logo would be successful, because in the past each new product launch brought in rave reviews and big profits. The team felt that they were untouchable, and this cavalier attitude resulted in their failure. The team also did not know when to admit defeat because they were only thinking about past successes.

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