Biases in Decision Making (pdf)
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Added on 2021-06-14
Biases in Decision Making (pdf)
Added on 2021-06-14
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Decision-Making Bias 1Decision-Making BiasNameInstitutionTutorCourseCity/StateDate
Decision-Making Bias 2Executive SummaryTo measure the personality traits of individuals, the Myers-Briggs Type Indicator (MBTI) is used to diagnose individual's traits. This is accomplished by categorizing these traits into four major divisions in which the traits of the individual being tested can be grouped. This indicator offers a glimpse into a person’s inclinations in regards to decision-making. Everyone is affected by biases in their own personal way. Biases include familiarity heuristic, risk aversion, sunk cost, illusion of control, and Excessive optimism among others.IntroductionA person's characteristics, including personality and experience, can affect the means people use to make decisions. Therefore, a person's susceptibility can either be a positive or a negative influence on decision making process. From a psychological point of view, the decision is always determined by needs and enlarged by a person’s preference. Biases can warp and damage the objective contemplation of a decision by adding disruptions to the procedure of decision-making. These disruptions are usually separate from the point in the decision. Bias is simply the susceptibility towards error. To put it simply, bias is preconception to arrive at decisions while already affected by a latent belief. We are commonly unconscious of these biases whichcan influence our decisions. This report tackle the major biases in a business setting, specifically, Wesfarmers: Risk Management department. Listed below are some of the most common cognitive biases that affect the decision-making process of the managers at Wesfarmers.Common BiasesExcessive optimism is related to the overestimation of the number of likeable results in compared to
Decision-Making Bias 3the unlikeable ones (Clark, Robert & Hampton 2016, p. 87). This kind of bias exists in a huge array of fields. For example, for the issue of the debt-equity ratio for financing, the main cause for debt problems presently is corporate management’s previous unrestrained optimism. In addition, introducing a fresh product into the market is rarely rid of forecasting bias. Therefore, several of the forecasts are never rid of errors. But this isn't surprising at all because many of the companies may unwillingly be engaged in unrestrained optimism, majorly when their existence is dependent on favourable forecasts (Leong & Zaki 2018, p. 170). Plus to corporations, being affected by unrestrained optimism, people also show it, both, when they are deciding on their investments and in how they live their lives. In a study on the effects of emotion on the value of stocks, it was concluded that emotion surely has an effect on asset valuation. In a 2017 risk management sustainability report under ethics and responsibility, Wesfarmers pride themselves with their ability to deliver favourable outcomes to their shareholders. They state that their framework involve policie and codes of conduct that govern the behaviour of their managers and employees. This is their primary goal. The company is highly optimistic and overconfident. With this optimistic coed of conduct the decisions of managers are limited and directed by them. One can be innovative but only through our codes of conduct.The illusion of control can be defined as the habit of individuals to trust that which they can control and/ or affect the result of in real life than that which they have no control over (Stefan & David 2014, p. 89). This kind of bias is seen in everyday life, for example, it may include situations like successfullyrolling a dice to a double sixes or picking winning lottery numbers. The illusion of control grants people the wrong idea that result can be affected by individual involvement when the real life is quite different. Plus as Yarritu, Matute and Vadillo (2014, p. 38) stated, individuals usually show overconfidence and illusion of control, confirming their assumption towards the mistake. The easiest
Decision-Making Bias 4way to deal with the illusion of control is to maintain the course of the transaction, for example, in the case of investors, it would assist if the investor kept a list of the characteristics that are identified to be in favour of the investment. Case study in this case is the debacle which is Homebase. When acquiring Homebase, Wesfarmers had he illusion that the company would continue to be profitable, but less than two years down the line, they are faced with the challenge of having to consider leaving the business which is bleeding cash. The company is due to post a loss of A$ 97 million when Wesfarmers release their interim results this year. It has been reported that some investors have questioned the procedure followed during the acquisition of Homebase.The familiarity heuristic argues that individuals’ capacity to views actions as likely to occur is dependent on their ability to remember particular information linked to that action (Schwikert & Curran2014, p. 2341). The familiarity they have with that information will surely affect their decision making.Familiarity heuristic can be defined as what that proves how the bias of availability is linked to how easy one can recall. Familiarity bias is most prominent in marketing. Bui, Hamilton & Kemp (2015, p. 739) argue that the insight people have over a certain brand is dependent on how much they are familiar with products from that brand. So when a customer is doing a purchasing their decision to buy one product over the other is affected by their level of familiarity with that product, if their familiarity with the product is high, their decision to buy the product will be fast and easy (Huang 2016, p. 665). Another bias is loss/risk aversion or prospect theory. This is linked to people's strong wish to avoid losses and instead make any sort of gain (Aperjis & Balestrieri 2017, p. 203). It is important to note thatloss aversion will be more severe when the issue is viewed from a negative angle; people make a much worse decision when facing a negatively formulated dilemma (Heeren, Markett, Montag, Gibbons & Reuter 2016, p. 50). Risk aversion theory specifically states that losses are felt twice as much by individuals compared to similar profit (Imas, Sadoff & Samek 2017, p. 1271). The theory of loss
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