Courtesy: Scott Adams

IIMB Strategic Thinking & Decision-Making, Lecture 11 1

Strategic Thinking & Decision Making

Session 11: Heuristics & Biases 1

IIMB Strategic Thinking & Decision-Making, Lecture 11 2

 A few terms we have been using
• Cognition
– Mental process of acquiring knowledge through
thought, experience and the senses. (Concise
Oxford Dictionary)
• Decisions or Choices
• Utility or Value
• Rationality …..?

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System 1
• Crafts coherent stories - WYSIATI
• Associative machine
• Favours cognitive ease
• Ignores causality in favour of co-relation
• Jumps to conclusions
• Speed rather than accuracy

Helped along by The Lazy Controller – System 2

IIMB Strategic Thinking & Decision-Making, Lecture 11 4
 During World War II, USAF bombers were getting hit by anti-
aircraft guns. Officers wanted to add some protective
armour plating to the planes. The question was WHERE?
The aircrafts could only support a few more kilos of weight
without undermining operational performance.
Plans returning from missions were analysed for bullet and
shrapnel holes. They found 1.93 bullet holes/sq ft near the tails
and only 1.11 bullet holes/sq ft close to the engines.
Where should they apply the armour plating?
Around the engines. “We are counting the planes that
returned from the mission. Planes with damage to the
engines did not return at all.” – Abraham Wald
Why do we tend to suggest protecting the tail area?
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A whale conforms to a rule or category I

have in mind.

What is the rule or category? Give examples

and state your rule/category.

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 Say whether the following statement is true
or false.

There are more words in the English

language that start with K than words with K
as the third letter.

Other experiments such as list of names……

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Availability
• The process by which an idea or thought is
‘brought to mind’.
• Quickens search for solutions
• Function of salience, relevance and vividness
• Resulting bias …
– Recency and other effects
– Inhibits the action of System 2 thinking
• Sometimes compromises rationality

IIMB Strategic Thinking & Decision-Making, Lecture 11 8

 Examples
• What part of body do boys and girls between 6 and
10 years’ age injure most frequently?
• What is the most frequently occurring cause of death
among Indians of 20-55 years of age?

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Applications
• Use of famous personalities in advertising
• Choice of bright colours in graphic designs
• Use of RED light to signal danger
• Generalising from example – analogies, e.g.
• Use of a cause celebre* to seek support for a
cause

*A person or issue that attracts a great deal of attention

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 Anchoring

• As adjustment • As priming

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Anchoring as Adjustment
• We rely on (anchor) first item of information, trait or value and
adjust our judgement to that value.
• Bias occurs when anchoring leads to disregard of other, equally
relevant information for decision making.
– Error in accurately assessing the value of an outcome
• Kahneman & Tversky Experiments
– Per cent of African nations members of UN
• One group of respondents anchored around 15% another
around 65%
– Genghis Khan date test  adjusting around phone numbers

Adjustment is a deliberate (System 2) activity, yet bias.

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 Examples
• A smart sales person shows an expensive product
first. A cheaper product shown later now compares
unfavourably with the first.
• The price first offered becomes an anchor for
negotiation.
– Should you make the first offer or wait for it?
• Why do managers find zero based budgeting
inconvenient?
– We have no anchor (last year’s sales/costs).
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Anchoring as Priming/Suggestion
• Experiments evidencing priming effect:
– Gandhi’s age  less or greater than 144 yrs.?
– Average price of German cars?
• Estimates differed when primed by luxury brands
versus mass-market brands
– Florida (ideomotor) effect (Ch. 4, mandatory
reading)
– Associative priming – word completion expt.
Associative coherence seeking: System 1 at work.
IIMB Strategic Thinking & Decision-Making, Lecture 11 14
 “Representativeness is an assessment of the
degree of correspondence between a sample
and a population, an instance and a category, an
act and an actor or, more generally, between an
outcome and a model. The model may refer to a
person, a coin, or the world economy, and the
respective outcomes could be marital status, a
sequence of heads and tails, or the current price of
gold.”

- Amos Tversky & Daniel Kahneman

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Representativeness
• Rule of thumb used for probabilistic judgement
of an event occurring, or hypothesis being valid
• Judgement based on how much the hypothesis
resembles available data
• Useful for quick judgements
• Causes bias
– Conjunction fallacy
– Base rate fallacy
– Inconsistency with laws of chance
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 Conjunction Fallacy
• The Linda Problem*
– Linda is 31 years old, single, outspoken, and very bright. She
majored in philosophy. As a student, she was deeply
concerned with issues of discrimination and social justice,
and also participated in anti-nuclear demonstrations.
– Which is more probable?
• Linda is a bank teller.
• Linda is a bank teller and is active in the feminist movement.
• Majority of subjects opted for bank teller + feminist. This is clearly
less probable than either one.
• Logical fallacy occurs when combination of specific conditions
are assumed to be more probable than a single general one.
*Kahneman & Tversky
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Other effects of Representativeness

• Base rate fallacy
– Richard is a 30 year old man living in a town that has 60
engineers and 40 lawyers. He is married with no
children. He is highly motivated and well liked by his
colleagues.
– What’s the probability of Richard being a lawyer as
opposed to Engineer?
• Misconception of chance
– In considering tosses of a coin for heads or tails, which
of the following sequence is more likely?
– HTHTTH
– HHHHTT
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 Yet other effects of Representativeness
• Insensitivity to sample size
– A certain town is served by two hospitals – one small (15
babies are born each day) and the other large (45 babies
are born every day).
In either of these, approximately 50 % of babies born in a
given year are girls. However, the exact percentage varies
from day to day. For a period of 300 days, each hospital
recorded the days on which more than 60% of the babies
born were girls.
Which hospital do you think recorded more such days?
(a) The Larger hospital
(b) The smaller hospital
(c) About the same
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The triples problem

The numbers 2 4 6 (a triple) conform to a rule I
have in mind. Can you discover this rule by
generating triples of your own?

You can state the rule you think I have and your
triple. I will confirm if it is correct. Do not
announce your rule unless you are sure it is
correct.
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 Set relationships on Wason’s 2 4 6 problem
(1960)
Universe - All triples

All ascending triples

Your triples

•Example of Confirmation Heuristic and Confirmation Bias

•Limits expansive search for solutions.
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Confirmation Bias
Seeking confirmation of hypotheses or beliefs
and disregarding evidence to the contrary.

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 Confirmation Bias in action…..?
• Blind tests had indicated that taste of New Coke was
preferred to regular Coke and Pepsi. But Coca Cola Co.
never considered how American people will respond to
withdrawing regular Coke. What was their belief?
• White House did not WISH to believe Iraq did not have
WMDs even though Naji Sabri (a Foreign Minister of Iraq)
had told a CIA agent so.
• Enron’s Jeff Skilling repeatedly rejected reports from
lawyers that traders had contributed to manipulating
California’s energy market.
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Why are so many strategies me-too?

Why do people tend to agree with majority
view in group decisions?

Groupthink!
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 To the believer no evidence is necessary;
to the atheist, no proof is enough!

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Availability heuristic
Why bias occurs? Representativeness

• Attribute substitution
– Which part of their bodies do 6-10 year old boys
commonly injure?
– What is the most frequent cause of death among the
20-50 year olds in India?
– Between two finalists for a job for a sales executive’s
job which of the two young women is a better choice?
• The short haired one in black skirt & white top
• The woman in saree, pleated hair and bindi

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 Recap 1
• Intuitive thinking relies on heuristics.
• Heuristics are necessary for intuitive thinking.
• Quicken search for solutions, judgement
• Also cause bias and errors of judgement

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Recap 2
• Availability: “quickly brought to mind”
• Anchoring as adjustment or priming
– Deliberate or involuntary ‘anchoring’ in judging an outcome
• Representativeness: how alike it is.
– Conjunction fallacy
– Base rate fallacy
– Insensitive to sample size
• Confirmation:
– Seeking to validate an assumption or hypothesis
– Avoiding, rejecting contrary evidence
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 Effects of Bias Practise using
Systems 1 & 2
• Affects judgement of in conjunction!
– Chance events
– Future outcomes
• Compromises rational choice
• Hinders expansive search for better solutions
• Leads to conformity with majority view
– Lack of challenge leads to risky decisions

Disastrous decisions, dramatic failures!

IIMB Strategic Thinking & Decision-Making, Lecture 11 29

Courtesy: Scott Adams

IIMB Strategic Thinking & Decision-Making, Lecture 11 30

 “The whole problem with the world is that fools and
fanatics are always so certain of themselves, and
wiser people are so full of doubt.”

- Bertrand Russell (1872-1970)

British philosopher, logician, mathematician, historian, writer,
essayist, social critic, political activist, and Nobel laureate

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