Managerial Decision-Making: Cognitive Biases in Management (BUMGT5980)

This essay delves into the complexities of managerial decision-making, focusing on cognitive biases that can skew the process. It examines three key biases: framing bias, overconfidence bias, and confirmation bias, detailing their impact on decision outcomes. The essay provides clear definitions, expl...Read More

MANAGERIAL DECISION-MAKING
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Part 1
Introduction
Managerial decision making is intrinsically a perception activity that results from thinking
logically or unreasonably. Bias in the decision-making process means that there exists
partisanship for or against certain ideas and these present a decision that is not rationally based
on evidence or facts. Bias in managerial decision making is common and results in decisions
influenced by different factors and this form of bias can be explained through framing
preference, confirmation bias and overconfidence bias. At times bias can result in decisions that
help an organization or decisions that could financially or otherwise harm the organization. This
essay will discuss how these three factors influence the decision making process in management
to bring about bias.
Framing bias
Framing bias takes place in the managerial decision-making process when managers make
decisions based on information presented to them and not making decisions based on evidence
(Combe, 2014). The same information can be presented in two different ways decisions based on
how the information is presented to them and not merely on the facts behind the presented
information. The framing effect in the decision-making process was discovered by Daniel
Kahneman and Amos Tversky who described prospect theory that is termed part of framing
effect and described it as a cognitive bias that presents when making conclusions to certain
information (Kahneman & Tversky, 2013). Framing effects on decision making will mainly
depend on how positive or negative information provided is perceived to be by the management.
Losses are perceived to be more worthy of attention and therefore information that is linked to
losses is likely to be avoided as opposed to information that presents a loss that is probably likely
to occur. A loss that is probably to occur appears to be positive and therefore accepted and sure
loss information is avoided as it is significantly negative (Aczel et al. 2015). Framing effect in
the managerial decision-making process is considered to be the most powerful form of bias in
decision making as decisions are made depending on how information is presented to the
management. Framing can present significant negative effects on an organization and therefore it
is comparative that the management asks themselves questions before taking into consideration
the data presented to them. Recognizing the presence of framing effect during the decision

making process help identify it and avoid making decisions that are biased by the management
(Cornelissen & Werner, 2014).
Overconfidence bias
Overconfidence bias in the managerial decision-making process presents when there is an
inclination to cling on an incorrect and deceptive evaluation of the management's intellect and
skills (Mallik, Munir & Sarwar, 2017). Overconfidence bias comes into play in the decision
making process majorly because of ego reliance on the understanding that the management feels
they are better than they actually are. Overconfidence bias occurs in different ways such as over
ranking, timing optimism, the illusion of control and desirability effect. Overconfidence occurs
in the form of over ranking when the management rates their performance to be maximized then
it actually is. Major problems are likely to arise if the management makes overconfidence bias in
the decision making process if they think they are above average when actually they are not.
Overconfidence due to the illusion of control occurs in the decision-making process when the
management think that they are they have more control than they actually do making them prone
to mistakes in the process of making decisions (Zhang & Cueto, 2017). The illusion of control
leads the management into undertaking risky decisions with the thought that they are in control
when in reality they are not and therefore more likely to make wrong decisions that could cause
losses to their organization. Desirability effect type of overconfidence bias occurs when the
management makes decisions overestimating the probability of the likelihood of a setback
occurring simply because there is a desirable outcome. Timing optimism type of overconfidence
bias in the managerial decision-making process occurs when the management overestimates how
fast they can get things done and underestimate the time it will actually take to the work done.
Managers based on overconfidence bias tend to always predict success despite making
continuous losses in their organizations and these may impede the organization's probability of
making success in the near future (Kourtidis, Šević & Chatzoglou, 2015).
Confirmation bias
Confirmation bias is a type of cognitive bias where the managerial decision-making process is
influenced by their past opinions and do not take into consideration the currently available
information (Felfernig et al. 2018). It is psychological in nature and affects how managers do
away with current information that refutes their opinions and do not consider the information

simply because it does not concur with their opinions. When managers are presented with
potentially useful information and look for information that supports their personal opinions and
this could lead to the making of wrong decisions that may cost their respective organizations. To
help the management make decisions that are devoid of confirmation bias it is important that
they first accept that there is the existence of confirmation bias in the decision-making process
and its effects (Lidén, Gräns & Juslin, 2019). The acceptance of existing confirmation bias leads
the management to seek new information that will enable them to make objective decisions
regarding the matter at hand. The desire to be right is one of the major contributors of
confirmation bias because the management feels the need to prove they are right even though the
current information available is against their help opinions. Confirmation bias is a shortcut taken
by the brain when making decisions and it requires energy to synthesize new information,
therefore, the cognitively it is easier if less energy is used to make decisions thereby promoting
confirmation bias (Marty et al. 2019). The human mind is developed in a way that once an
opinion has been embraced it will try in every way possible to gather data that supports this
opinion, therefore, making it hard for new information to be accepted reinforcing the
confirmation bias in the managerial decision-making process (Komljenovic et al. 2018).
Confirmation bias presents a threat to our judgement and subsequently the decision-making
process meaning that this form of bias should be identified as it gives a lopsided view of things
even when the available is against the held opinion.
Conclusion
Biases falsify and throw into disarray the available objective information by bringing in
influences in the managerial decision-making process. The three forms of bias discussed in this
essay, frame bias, overconfidence bias and confirmation bias affect the decision making process.
They should be identified and addressed in order to make objective decisions that help the
management grow their organizations rather than make biased decisions that negatively impact
their organizations. It is imperative that the management comes up with ways to recognize these
biases during the decision-making process to help the management become objective. Though it
is impossible to absolutely abolish biases in the decision-making process it is vital that
organizations try and find ways of minimizing the various forms of bias in their management to

bring about success in their organizations. Biases are always present in the managerial decision-
making process and recognizing them is the first critical step in solving them.
Part 2
Introduction
Biases are present during the decision-making process and it is important that these biases are
identified and addressed so as to make objective decisions. Critical analysis of information
presented is essential before coming into the conclusion that there was bias in the decision-
making process. After bias has been identified in a decision-making process it is imperative that
measures be put in place to ensure that future decision-making processes are not again influenced
by the bias.
Analysis of a case scenario using framing bias
Case scenario
A hospital wanted to buy medical equipment and invited two companies that sell medical
equipment to come and present their information as to why the medical equipment needed should
specifically be bought from their company. Company A stated that the equipment needed would
cost $40,000 and they would give a one year warranty for the equipment. Company B stated that
the equipment would cost a quarter of %160,000 and one year warrant given for the equipment.
The hospital management decided to buy the equipment from A but unfortunately, the equipment
broke down after two and a half years.
To recognize frame bias in the scenario presented it is important to objectively analyze the
information given by the two companies and how it influenced the hospital's management
decision making process (Bruine de Bruin et al. 2015). Framing bias occurs when the manner in
which the information is presented affects the decision-making process. Both companies were
selling their equipment at $40,000 but company A presented their information in a simple
manner compared to company B whose information was presented in a complex manner.
Framing bias is present and in the case scenario and it influenced the hospital's management
decision-making process. To identify bias in the presented information it is important to first
understand the meaning of the bias to be recognized and how it presents itself in the information

presented. To address frame bias in the scenario it is vital that the management understand the
weaknesses that led to the bias and put in measures to prevent it from happening again
(McDonagh et al. 2018). Professional economists would have helped the management solve the
mathematical problem in the scenario and enable the management to make an objective decision
before buying the equipment (Bhaskar, Danermark & Price, 2017). The process of identifying
and addressing bias in decision making helps the management not to make similar mistakes in
the future.
Analyzing a case scenario using overconfidence bias
Case scenario
The chief executive officer of company C was retiring and the company’s management needed to
swiftly hire his replacement. The list of possible replacements and their curriculum vitae were
presented by the human resource office of the company. The management chose Mr Paul who
had been a chief executive officer at the significantly smaller company had little experience in
managing such a big company and within two years the flourishing company was now into huge
debts.
To recognize bias in the scenario is important that the information provided is evaluated
objectively. To identify overconfidence bias in this scenario, first one has to understand what
overconfidence bias means (Eckhaus & Sheaffer, 2018). Overconfidence bias presents when the
decision-making process is influenced by the ego feelings of having more qualifications than
they actually have. The management of company C show overconfidence bias by picking a
person less suited to run the activities of the company (Hribar & Yang, 2016). The new chief
executive officer also shows overconfidence bias by accepting a job that he did not have the
required skill to run it. To address overconfidence bias in this scenario the management should
keenly review the qualifications of the interviewees and choose the one with skills that match
those that are required. Self-evaluation of the people being interviewed for the job will help them
identify if they have the required skills to run the company. Mr Paul would greatly benefit from
self-evaluation as it will help him identify the skills he has and his limitations and building on
them other than showing overconfidence in himself on skills he does not have (Ashour, Hassan
& Alekam, 2018). The process of identifying the bias present in the information provided and
addressing the bias helps avoid such bias in the future by the management.

Analyzing a case scenario using confirmation bias
Case scenario
Company T has been making quarterly profits of 3-5% for the last three years. New information
regarding the market they serve shows that there are new strategies that can be applied by
company T to increase their quarterly profit margins. The management of the company decided
against adopting the new strategies arguing that they are comfortable with their strategies and the
profits they are currently making.
To recognize the bias present in the scenario it is of essence that the given information is
analyzed objectively. Confirmation bias means that decision making is influenced by the
previous information obtained by the management and using it make opinions (Ferretti &
Montibeller, 2016). The company's management fails to take consideration of the current
information available that enable the company to make more profits but inclined to their previous
strategies. To evaluate bias in the scenario it is important that the scenario is analyzed objectively
noting its merits and demerits. Understanding of the bias to be recognized also helps in
identifying the bias in the given scenario. To address the confirmation bias in the scenario it is
imperative that the management embraces the current available even though it contradicts their
previous opinions on market strategies (Heneghan et al. 2017). Attending a seminar where the
current market data will be discussed would help the management get an opportunity to
interrogate the current information before making a decision to reject it. Learning the new data
objectively will help the management change their minds and adopt new opinions that are more
valuable and beneficial to their company. The decision outcome of the scenario will change if the
management takes into consideration the new market data and they will make more profits
(Cullen & Adams, 2012).
Conclusion
The scenarios presented above show how different forms of bias affect the decision-making
process. Analyzing each scenario individually and identifying the bias present helps come up
with strategies that address the bias to avoid such bias in the future. Identifying bias in the
decision-making process helps the management learn from their past mistakes and therefore
come up with solutions to those biases. To recognize bias in a scenario one has to know how the

bias presents itself then objectively analyze the information available to identify it. Accepting the
presence of bias in a decision making the process by the management is the first step in
addressing the bias as they already know the issue they are dealing with. The three forms of bias
discussed in this essay show how decisions can be influenced by bias and the negative outcomes
that are associated with biased decision-making processes.
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