Biases in Managerial Decision Making

This report explores the various types of biases that hamper decision-making processes in managerial decision making. It discusses the impact of overconfidence bias and framing bias on decision making and provides case studies to illustrate these biases. Strategies to address these biases are also discussed.

Running head: MANAGERIAL DECISION MAKING 1
MANAGERIAL DECISION MAKING
Name of Student
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MANAGERIAL DECISION MAKING 2
MANAGERIAL DECISION MAKING
Part 1
Introduction
Every day, human beings find themselves in decision dilemmas. Decision-making is
influenced by significant factors including belief in personal relevance, socio-economic status,
individual’s differences, sunk outcomes, escalation of commitments, cognitive biases, and
experiences. For these reasons, humans become explorative in order to deal with the
uncertainties involved in effective decision-making and come up with the best decisions in
various situations (Dietrich, 2010).In addition, personal values play a major role in decision-
making processes among individuals. Ineffective decision-making processes, individuals are
bound to make decisions that match their personal values, in such cases decisions matching
individuals personal values are more likely to be the correct choices. Adherence to personal
values leads to objectively rational behavior. However, various types of biases including
overconfidence, framing preferences, motivation, and emotion, may affect effective decision-
making. These types of biases may interrupt and distort objective contemplation of issues
through the introduction of influences from these biases, which are separate from the decision its
self. This report explores the various types of biases that hamper decision-making processes.
Overconfidence
Overconfidence is a major type of biases involved in decision-making. Overconfidence
bias refers to the tendency by some decision makers to overestimate their individual capabilities
than necessary. The character of an individual may inform overconfidence bias. Most
importantly, overconfidence makes people to falsely believe that they are more ethical than they
necessarily are. Through overconfidence, individuals hold a distorted assessment of their talents,
intellect or skills. For this reason, they tend to believe that they better than they are.
Generally, overconfidence is manifested through three different ways, which include
overestimation, over placement and over precision. Overestimation arises when individuals
overestimate their actual abilities, their chances of success, the amount of control that they have
and their performance (Abigail, 2017). For example, Mary, a manager in a local bank may
assume that they can make all decisions without any consultations yet in the real sense, they find
out that they can only make a few decisions without consultations. In Such a situation, the
manager can be said to have overestimated herself.

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Secondly, overconfidence may also be recognized through over placement, which arises
when an individual believes their position to be higher than that of the people around him or her.
For example, John and his other classmates sit for an exam rated out of 100 marks. John is
convinced that he will get a better score than his classmates. However, in actual sense, he
received a score lower than that of his other classmates. In such a case, John can be said to have
over placed his rating.
Thirdly, it might also be manifested through over precision, which occurs when an
individual becomes too confident that they know the truth.in an example, a teacher asks her final
year students how prepared they are to handle their final exam and they all reply that they are
100% certain that they will get a distinction. However, when results are out only 20% of the
class gets a distinction. Therefore, this means that the students had an 80% error rate. The
student can, therefore, be said to have been over precise (Abigail, 2017).
Overconfidence may make individuals estimate probabilities poorly because of
the belief that they are more informed and smarter than they actually are. Most often
overconfidence leads to the underestimation of risks involved in a given situation, which can
lead to potential negative consequences (Camenzuli, 2016). The impacts of overconfidence may
be avoided through being objective in the process of making and evaluating decisions
Secondly, motivation and emotion may have an impact on decision-making processes. Emotions
refer to intense feelings that are focused on an object, situation or a person. Often, the intensity
of emotions may negatively affect rational decision-making. This, therefore, means that rational
decision-making has no room for emotions. Emotions during decision-making may lead to errors
in processing information, leading individuals to act in an illogical or unreasonable manner.
Emotions can also lead to biased decisions and lead to the distortion of judgment.
Motivation and Emotion
The impact of emotions during decision-making processes may be reckless or unexpected
actions. However, emotions may have a positive or negative impact on decision-making
processes. While positive emotions enhance the ability of an individual to employ heuristics in
decision making, negative emotions may hamper cognitive processing of information leading to
poor decisions. In Motivational biases, judgments are influenced by the choices, outcomes,
consequences, the undesirability or desirability of events. Motivational biases entail the
subconscious or unconscious distortions of judgments because of the organization context, social

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pressures, and self-interest (Lench & Levine, 2010). While motivation is the internal, state that
gives direction to an individual’s actions, feelings and thoughts, emotions are the experience of
feelings, which affect and activate behavior.
The two concepts are related based on three reasons. First, they both activate behavior.
Secondly, emotions are attributed to own motivational properties. Thirdly, emotions often
accompany motives. Emotions arise after the interpretation of events happening around us
through beliefs, thoughts, and memories. This interpretation triggers how we feel and behave.
This process may influence all decisions in some way. However, different emotions may affect
decisions differently. For example, sadness emotions may make individuals settle for decisions
that do not promote their welfare. Either way, decisions arrived at through emotions may not be
the most effective decisions
Emotions may affect not only the nature of decisions arrived at but also the speed at
which these decisions are made. For example, being angry can make someone impatient
therefore leading to rushed decision-making. In the same way, excitement may result in the
making of decisions without consideration of the implications of those decisions.Also, if
someone is afraid, their decision-making process may be clouded by uncertainties and caution.
This would, therefore, make an individual take long before making a decision.
Individuals can, however, manage motivations through a number of strategies. First,
there is the need of taking time to assess the current situation before making a decision. This will
help in making the correct choice. Additionally, reliance on gut feeling always should be avoided
because gut feeling comes with 50/50 probability. Asking for a second opinion from the majority
may also help avoid biased decision-making (Kulkarni, Peintner & Bogle, 2016).
Framing preferences
Framing bias is used to describe a cognitive bias whereby the decision of a person is
influenced by the way in which the information used to arrive at it is presented. In this case,
people are forced to decide based on the way in which the information is presented. Framing is,
therefore, an alternative representation of a similar concept or objective. It may end up altering
the models, assumptions and the decisions made from the information represented. Outcomes
presented in a positive light may, therefore, be more preferred than outcomes presented in a
negative light(Kulkarni, Peintner & Bogle, 2016).

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Framing of a problem in the right way is therefore important because the human brain
largely relies on the first piece of information that is received. According to the standard
economic model, people are more likely to choose the same option if it maximizes expected
utility. In a study carried out in 1979, it was found out that framing influences choices made by
individuals (The Decision Lab, 2019). Therefore, in framing, people use the presentation of
information to make decisions as opposed to the use of facts presented in the information. This
means that if the same facts are presented in two different ways, people may end up making
different decisions using the same facts. In the investment circles, investors’ reactions to a
particular investment opportunity may differ based on how the opportunity is presented to each
one of them (Corporate Finance Institute, 2019). Therefore, different situations, settings, and
wordings are likely to have a great impact on decision makers.
According to the prospect theory, Framing may come to inform of loses or gains.
According to this theory, individuals perceive losses to be more significant; therefore, they are
more likely to look for ways of avoiding losses than the equivalent gain. In the same way, a
probable gain is less preferred than a sure gain.Also, individuals are more likely to prefer a
probable loss than a sure loss (The Decision Lab, 2019).
Framing has emerged as one of the most dominant biases in decision-making. Framing
can be used in priming, social pressure and in emotional appeals. In this context, people will be
more likely to avoid risks if a positive framing is presented and likely to seek risks if a negative
frame is presented. Research has found that the effect of framing bias increases with age(The
Decision Lab,2019).
Framing biases may be avoided through a number of strategies. The first step is usually
challenging the framing. An individual may consider rephrasing the information presented to
them to see if it will have a different impact on them. Through this approach, an individual may
incorporate a reflective and logical approach to decision making in order to avoid thoughtless
and reflexive decisions (Corporate Finance Institute, 2019).
Part 2
First Case study: Overconfidence bias
John was a vying as a presidential candidate in country ABZ where he had worked for
several years in various government ministries and institutions. Based on his vast experience he
decided to try his luck by vying for the presidency in a race dominated by more than 10

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candidates. Based on his vast experience in different capacities john was convinced that he
would win by a landslide. One evening while conversing with his wife, he told her to start
preparing to become the first lady in a few months' time. At one instance, he was overheard
telling some of his competitors to give up on the race because he was the only candidate who
stood a chance of the emerging victorious in the race. Because of this conviction, John did not
bother to campaign. He left his competitors to campaign because after all he was already famous
and an achiever who had done much for the people.
However, on the election date, John lost, emerging position seven out of the 10
participants. Although he was a qualified candidate for the position, John lost because of his
overconfidence.
Form this scenario, bias may be recognized through several aspects presented in the case
study. The first and the most visible is the assertion by John that he would automatically win the
race because he was the most experienced person. Secondly, the fact that he tells his wife to start
preparing to become the first lady in a few months shows that he was sure of winning the race.
Finally, John did not campaign because he was confident that the would beat his competitors. In
addition, he tells some of his competitors to quit the race because they would lose. These
instances in John's case signify overconfidence bias
Overconfidence bias from the scenario may be measured by comparing the expected
outcome vs the actual outcome of the election (Huisman, van der Sar, & Zwinkels, 2012). In his
assertion, he was 100% sure that he would win the presidential race. However, in actual sense, he
only managed to become position seven .It can, therefore, be argued that he had a 70% error in
his assumption.
The overconfidence identified in the case study may have been avoided through various
strategies. One of these strategies is the use of the wisdom of the crowd. Wisdom of the crowd
would have been utilized by collecting the guesses from others and using them as the starting
point in decision-making. Secondly, he could have assumed that his first guess was wrong and
thought of a second guess based on different reasoning(Ferretti, Guney, Montibeller & von
Winterfeldt,2016). By averaging these two guesses, he would have arrived at a more objective
starting point.
Using the wisdom of the crowd or an alternative would have made it possible for him to identify
alternative possible outcomes instead of reliance on a biased opinion. He would, therefore, be in

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a better position of making a more informed decision that would have made it possible for him to
win the election (Ferretti, Guney, Montibeller & von Winterfeldt, 2016).
Second Case study. Framing bias
In an example, organization two organizations while trying to create sales for their
products one organization framed their products as having an 80% quality guarantee while the
other framed their products as having like 20% faulty rate. Among the two organizations,
organizations, the organization with an 80 % quality guarantee sold more compared to its
competitor
Although the two organization were selling the same concept, the organization with a
positive frame was able to sell more. The only difference is the fact that the first organization
focused on selling a positive message while the second organization focused on selling a
negative message to its targeted customers. Among, the two campaigns the consumers were able
to decide based on the negative or positive semantics used in the promotion message as either a
gain or loss. In a situation where a positive frame is presented, individuals tend to avoid risk. On
the other hand, where a negative frame is presented people tend to seek risks (O'Shea, Watson &
Brown, 2016).
Bias in the scenario may be recognized as in the fact people were more willing to buy
from the organization that had a positively framed message even though the messages from the
two companies were similar. Framing bias is also presented by the fact it is clearly visible that
the customers of the two companies relied on the presentation of the two sets of information
instead of relying on the facts that were presented by the two companies (Zhen & Yu, 2016).
Framing bias may be measured by analyzing the correctness of the decisions made by
customers in both scenarios. The choice of the organization with 80% effective products as
compared to the organization with the organization whose products were 20% less effective did
not represent objective decision making since both products come with similar benefits. A
comparison of the possible benefits for the two products may, therefore, be used to measure
framing bias (Aczel, Bago, Szollosi, Foldes & Lukacs, 2015).
Framing effect bias may be addressed through the recognition of its presence. Customers
in the scenario should have been vigilant enough to notice that the information presented by the
two companies could have been presented and framed to look appear differently. There is also a
need to look at the gains and losses involved in a more realistic manner. Customers also need to

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Analyze how reasonable their comparison is and identify possible biases in the analysis of the
presented data (Kumar, 2018).
With these strategies, they will enhance their ability to make decisions based on the
objective analysis of the presented data
Third case study: Motivation and emotion bias
Company x has been advised by experts to use new strategies to facilitate its successful
penetration into market Z which as about 40 million consumers. According to the experts, the
organization’s successful penetration into the market will lead to a growth in revenue by about 5-
7% annually. The management of the organization has however declined the offer after stating
that they are okay with the profits being generated by the company presently, part of the reasons
given by the management is that about 6 years ago, they tried penetrating into a different market
out of which their efforts were futile.
Emotional bias can be recognized from the scenario by an analysis of the reasons given
by the management in their refusal to adopt the strategies proposed by experts based on
experiences. The management simply rushed to make decisions based on the emotions left
behind by their experiences six years ago. They did not take the time to analyze the proposed
strategies and their effectiveness in the proposed market (Floman, Hagelskamp, Brackett &
Rivers,2017). In addition, there was no rationality in the assumption by the management that
factors that led to failure 6 years ago could still be relevant in a different market for that matter.
The business in the scenario may be measured through a comparison of the potential
benefits and losses involved in the scenario. A decision by the organization to use the proposed
strategies could have resulted in an increase in profits margins by about 7% annually. In
comparison, the decision to continue using the current strategies does not come with any
additional benefits (Everaert, Duyck & Koster, 2015).
This could have been solved by an objective analysis of the proposed strategies. Through
this analysis, the organization would arrive at better decisions based on rational thinking instead
of reliance on emotions from experiences to make decisions.

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