Before You Make That Big

Decision.
Daniel Kahneman, Dan Lovallo, Olivier Sibony
By,
Nidhin(14PGP026)
Ratish(14PGP037)
Sravan(14PGP045)
Sanjit(14PGP060)
Group 5

Introduction

A lot of biases creep into every day decision making

Confirmation Bias ignore evidence that contradicts preconceived notions

Anchoring weightage to one piece of information

A McKinsey survey showed that reduction in bias led to higher returns

To reduce bias: review recommendation from some one else
Grasp the facts and check whether the facts are been clouded in any way

An executive cannot recognize his bias but can recognize those of their team

Challenges in avoiding bias

Two modes of thinking:

Intuitive Not consciously focusing but it gets done

Reflective activated when stakes are high or there is an error

Visual System +
Associative
Memory

A single
coherent
interpretation

Context

Intuitive thinking wraps stories around context that it suppresses everything

Individual to collective and decision maker to the process of decision making
Apply rational thought to detect others faulty intuition

Check for self-interested biases

Is there any reason to suspect motivated errors, or errors
driven by the self-interest of the recommending team?
Never to be asked to people making proposal
People do sometimes lie deliberately which leads to bias
A preference for a particular decision is built in
recommendation
Decision makers need to assess not whether theres a risk of
motivated error but whether it is significant

Review the proposal with extra care, especially for over

optimistic biases

Check for the affect heuristic

Has the team fallen in love with its proposal?
When evaluating something we like, we tend to
minimize its risks and costs and exaggerate its
benefits
Executives often observe this phenomenon in
decisions with a strong emotional component, such as
those concerning employees, brands, or locations
Rigorously apply all the quality controls on
checklist for all the biases that may have affected the
people making it

Check for groupthink

Were there dissenting opinions within the team? Were they
explored adequately?
In many corporate cultures, a team presenting a
recommendation to a higher echelon will claim to be
unanimous
The unanimity is sometimes genuine, but it could be sham
unity imposed by the teams leader or a case of
groupthink
Senior executive should strive to create a climate where
substantive disagreements are seen as a productive
part of the decision process, rather than as a sign of
conflict between individuals

Check for saliency bias

Could the diagnosis be overly influenced by an
analogy to a memorable success?
Many recommendations refer to a past success
story, which the decision maker is encouraged to
repeat by approving the proposal
The danger is that the analogy may be less relevant
to the current situation
Ask for more analogies, and rigorously analyse their
similarity to the current situation

Check for confirmation bias

Are credible alternatives included along with the
recommendation?
In a good decision process, other alternatives are
fully evaluated in an objective and fact-based
way
Both individuals and groups are prone to generating
one plausible hypothesis and then seeking only
evidence that supports it
One or two alternatives to the main recommendation
should be considered and pros and cons of each should
be thoroughly evaluated to arrive at a conclusion

Q6. If you had to make this decision again in years time, what
information do you want , and can you get more of it now?
Reviewing a recommendation is WYSIATI- we tend to overlook what is missing
Check for availability bias- use checklist of data needed for each kind of decisions
Q7. Do you know where the numbers came from?

Which numbers in this plan are facts and which are estimates?
Were these estimates developed by adjusting from another number?
Who put the first number on the table?
Check for anchoring bias- reanchor with figures generated by other models or bench
mark, and request for new analysis

Q8. can you see the halo effect?

It cause us to attributes the successes and failures of the firm to the personalities of
their leaders.
Often the team assumes that a person, organization , or approach that is successful
in one area will be successful in other area.
Eliminate false inferences, and ask the team to seek additional comparable examples

Q9. Are the people making the recommendations overly attached

to past recommendations?
Companys do not start from scratch everyday, their history and what they learn
from it matters.
Check for sunk cost fallacy and endownment effect: while making new investments,
disregard past expenditures that dont affect future cost or revenues
Consider this issue as if you were a CEO

Q10. Is the base case overly optimistic?

Recommendation contains forecasts, which are notoriously prone to excessive

optimism
Focuses exclusively on the case at hand and ignores the history of similar projects
Failure to anticipate how competitors will respond to a decision
Check for overconfidence, competitors neglect, planning fallacy
Have a team build taking an outside view, use WAR games

11.Is the worst case bad enough?

Worst is rarely bad enough
3 questions to ask:

Where did the worst case come from?

How sensitive is it to our competitors responses?

What could happen that we have not thought of?

Imagine the worst has already happened

Make up a story about it

12.Is the recommending team

overly cautious?
Less visibility
Under performance
Less creativity
Risk aversion strategies (avoid losses no gains)

Implementing quality control over

decisions
When to use?

Major capital expenditure decisions

Quality controllable decisions

Why should we conduct the review?

Enforcing discipline
Cost and benefits

Thank You