Human Behavior and Decision Making
Human behavior is an area that has been widely researched by highly reputable scholars. Herbert Simon, who is proclaimed as the prophet of bounded rationality, is one of the many scholars that have consistently worked towards building a theory of human behavior. According to Simon, what bridges the distance between behavior and rationality is the concept of “decision” (Mallard, 2015).The agents of decision-making value rationality as a way of choice and for that reason rationality are considered explaining the principle. According to Barros (2010), Simon defines rationality as “relation of conformance (efficacy) between pre-established ends and the means to reach them.” The effort to understand human behavior remains to be an area that is still rich for research, as so many scholars seem to have different findings. However, most of the findings tend to agree with Simon’s position that the human mind has a capacity that is smaller than the size of the problem it is expected to solve (Weyland, 2006). It is due to this incapability of the mind that most of the decision that people make tend to be inefficient.
Human Behavior and Decision Making
The concept of the criterion of efficiency is used about the choice of alternative “which produces the largest result for the given application of resources” (Simon, 1947, p. 179). There is the notion by global rationality that assumes decision makers are fully aware of all the available alternatives that are required in the decision-making and are capable of making a rightful choice. However, the experiences that decision makers go through is best explained by the bounded rationality that depicts decision makers as those who have to look for alternatives because they have incomplete knowledge of the possible outcome of their actions. The fact that there is no adequate understanding of the consequences of actions and the incomplete comprehension of alternatives makes it difficult to arrive at the most desired outcome (Spiegler, 2011). Unaided decision processes are known to use the rule of thumb, which can also be called heuristics that in most cases the conditions will always result in systematic errors (Samanez-Larkin & Knutson, 2015). Some people may consider decision bias as lack of knowledge or lapses of attention, however, it is regarded as a systematic flaw that occurs in the individual’s judgment, choices, or desires and it is an internal relationship. Some of the discrete concepts such as different types of judgment heuristics can be used to explain biases in decision-making.
Discrete Concepts that Explain Bias in Decision Making
Multiple concepts can be used to explain bias in decision-making, and one of the most common ones is the heuristics. Heuristics have been used more often about the problem-solving procedures that have been considered successful in solving daily problems. According to Maqsood, Finegan, and Walker (2004), heuristics have been widely used in analyzing very complex problems, however; it mostly leads to severe as well as systematic biases. Biases are known to be common when decision tasks are highly complex and when performed under a high degree of stress and deadline pressures. Human cognitive capacity is minimal which human judgment to be susceptible to errors and biases (Maqsood, Finegan, & Walker, 2004). This section explains two types of heuristics and the endowment effect and the way they explain bias in decision-making.
Anchoring is a commonly used in psychology to describe how human being tends to rely more on a single trait or piece of information when confronted with a situation that requires decision-making (Costa et al., 2017). People are not to have a focal point from where their decision is expected to be anchored, and it is mostly the very first piece of information leaned. Such a strong leaning on the first information can significantly affect the decision being made (Tversky & Kahneman, 1973). The two warned that the arbitrary numbers from where people begin their decision making from could lead to incorrect estimates.
The concept best explain how consumers respond to the various advertisements. For instance, most of the companies would like to indicate that they have reduced their prices from an initial higher figure, say $150 to a new lower price of $145. Based on the initial information, consumers are more likely to hurry up and purchase the product because it is $5 cheaper. However, it is possible that the same product could be selling at $140 in other shops around. Anchoring in a particular piece of information can easily lead to a bias decision, as it does not allow the decision makers to research before deciding. It is for this reason that Simon says that human being does not have the accurate consequences of the decision they make (Herweg & Müller, 2013). Anchoring heuristics demonstrates how people anchor in the nearby comparisons when making decisions and such shortcuts mostly lead to biases in decision-making. In that case, one needs to broaden their comparisons or merely change the environment to enhance their decision-making.
Anchoring Heuristics
This heuristic focuses on the frequencies of events based on how frequent such events are and the ease of or difficulty in retrieving such information from the long-term memory. This focuses on how much one is capable of remembering how often he or she engages in particular events (Newell, Lagnado, & Shanks, 2015). The judgment of frequency is considered the basis for estimating the probabilities of occurrences. Availability heuristic, however, depends mostly on the ease with which one is capable of retrieving such frequent incidents. Simon demonstrates that the human mind is inadequate and cannot be able to comprehend the relevant alternatives for a particular situation (Eysenck & Keane, 2013). As such, relying on the frequencies and ease of retrieving information from long-term memory as described through availability heuristic always lead to error or bias in decision-making.
The greatest challenge with the availability heuristics is the fact that people believe that those things that readily available in mind are commonplace. However, it is not true that everything that seems to be readily available in mind is automatically a commonplace (Hardman & Hardman, 2009). The fact that there is a high prevalence of crime does not automatically mean all or most of the crimes involve violence. However, that does not mean there are instances where the availability heuristics does not lead to valuable decision-making (Eysenck & Keane, 2013). The issue is that it has numerous instances where the decision can be erroneous or bias and therefore one has to be more careful when relying on the availability of events that can be easily remembered.
The endowment effect is used to demonstrate that people always value objects when they are in their possession more than when it is not. It follows the common say that a bird in the hand is worth two in the bush (Morewedge & Giblin, 2015). The moment one gets into possession of an object, they are always reluctant to give it out and should they decide to release the item, they are always asking for so much in exchange. Based on the endowment effect, people have always viewed opportunity costs different. For instance, most of the people tend to look at forgone costs as “out of pocket costs and that there is no much pain in the forgone gains than it is with the perceived losses (Simon, 1947). This concept always leads to the “status quo bias” which is a demonstration of preference in the current state that biases one from buying and selling. The decisions that are made based on the endowment effect are always not guided by reasoning but the desire to hold, that which is already in hand.
It affects decision making because it prevents the potential to exploit the most suitable economic decision at hand. Most of the people are more likely to hold on stocks that are not as profitable and end up in serious loses when they decided to sell them. The endowment effect demonstrates that human mind is not fully equipped to understand that complexity of making decisions regarding economics.
Availability Heuristic
Conclusion
The complexity of the problems that need to be resolved seems to be more than the capacity of the human mind that is expected to resolve such problems. This has subsequently led to numerous cases of bias decision-making process that led to the erroneous outcome. Human is generally incapacitated to figure out the possible consequences of the decisions that they make and not aware of the most suitable alternatives for every given situation. Consequently, the majority have always resorted to a quick solution that does not require mental effort, also known as heuristics. Besides the heuristics biases, the endowment effect equally has the potential of altering the way people make a decision, and so many people are more likely to get into wrongful decisions due to the desire of holding what is already in possession instead of one that is not. In all these, weaknesses of the human mind in making a rightful decision can only be explained by the bounded rationality and not global rationality.
Employees and management of any organization are expected to make decisions at various levels. For instance, there are daily decisions that management has to make to ensure that activities of the day are successful. Additionally, organizations are expected to make medium and long-term decisions that will guide the operations into the future. However, there has always been a challenge in coming up with the most suitable decision, and as such, so many businesses have been knocked out of the market (Taniguchi, Sato, & Shirakawa, 2018). Most of the businesses have fallen not because they have failed to make a decision but because the decision made was bias or erroneous. This paper highlights some of the concepts that have the potentials of leading to bias decision making in a workplace. The case below can be best used to illustrate scenarios where anchoring, availability, and the effect of endowment can lead to bias decision making in a workplace environment.
BulderIn Company Case
BuldersIn Company is a banking company that takes part in numerous sustainability programs. It remains one of the most reputable banks with a high level of customer loyalty and employee satisfaction. One of the recent sustainability programs initiated by the company was to invest in building affordable housing to reduce the housing crisis in major towns in Australia. The program was equally intended to provide low-income earners with quality and affordable houses. The company built multiple houses and set their prices far much lower than the standard prices in the town. However, very few people considered buying the homes and instead decided to continue living in their expensive and traditional houses. The head of the project felt that the marketing department was not doing enough to market the houses and that is people were reluctant to buy the homes. This follows after the marketing department scorecard for the month was found to have dropped significantly leading to a reduced sales volume. After deliberations with top management, a decision was reached to outsource real estate investors to buy the houses and the procurement was to do that within the next two weeks. Since the time was not adequate to go through the entire procurement process, three firms that prequalified were called, and the procurement committee decided to settle on the first one because he assured the members that he has quoted a lower process that will save the BuilderIn Company close to half a million. After awarding the tender and the deal signed, the management letter realized that the price quoted was not the lowest and that other companies would have led to a savings of more than half a million. Based on all these “mistakes,” human resource department decided to organize for a seminar and team building trip to help employees review on what could be the problem and the most effective way to go over the current challenges.
Endowment Effect and Poor Response to the New Houses
The Endowment Effect and Bias in Decision-Making
Endowment effect occurs when people consider what they possess to be of higher value than a similar product that is not in their possession.
The management blamed poor sales of the new houses despite the low prices of the marketing department, however; the chances are that the problem is due to the endowment effect. Through this bias, homeowners are known to value their houses and are more likely to price such houses highly (Strain, 2009). As such, people would prefer staying in what they already have because to them, what they have is equally “good.” Besides, when the house remains for long without occupants, people tend to view it as negative, and that could have been the problem that resulted in the inadequate response.
The best strategy to address the issue of the endowment, especially in a sustainable program, is beginning by giving tenants the opportunity to rent the houses and offer the first month for free for those who are ready to commit in writing that they will rent the house for not less than six months. Giving tenants the opportunity to “own’ the home for the first month for free gives them the possession required in the endowment effect, and they will understand the value of possessing the house in the long-term.
According to Blumenthal-Barby and Krieger (2015), availability heuristics is a type of heuristic, which explains the tendency of human being to make decisions based on the likelihood or frequency of related information.
From the case above, the manager blames the poor sales of the new houses on the inability of the marketing department. The decision seems justifiable because their performance score dropped significantly in the last performance review. According to the manager, he needed not to think much about what is happening because it was in the recent report that the marketing department was ranked lowest. While it could be true that there was some failure in the marketing team, it is biased to reach a conclusive decision that it was their mistake without any further effort determine the truth (Mamede et al., 2010). As it stands, the chances are that the poor sale was contributed mainly by the endowment effect where people are more likely to price what they do not possess more cheaply until when they own such products.
It was a bias conclusion that members arrived at due to the most recent occurrence that involved the crushing of the plane (Fiedler & von Sydow, 2015). The manager decided not to use more of the mental effort to find out the possible cause of poor response. It is for that reason that the problem of availability heuristic continues to continue to cause poor decision making in various workstations.
There is a need to create a room where due diligence is taken to investigate possible causes of the problems that organizations go through to establish the most representative outcome. Such decisions will lead to highly reasonable decisions that are not based on what the brain can easily retrieve. People in the workplace will know that the fact that an employee failed to meet his target this month does not directly qualify them to be the worst salespersons. Many other factors could have played out, and when carefully examined, it will be possible to avoid biases when making workplace decisions.
Anchoring is all about relying so much on the first piece of information without bothering to carry out further research.
The procurement officer did not bother to sample quotations brought by the other prospectus because the first one promised a saving of about $500,000. Relying on the first piece of information resulted in biased decision-making that led into the loss of close to twice what he thought he was saving. Even though the houses were part of the sustainability program, the decision to sell the houses to real estate firms within the sustainable program needed to benefit the course of the firm. The work of the procurement officers was to secure the best deal that would help the company save from the cost that was used to build the houses. However, the incapability of human mind to easily predict the outcome of their decision clearly explains the procurements action (Bao & Gong, 2016). He anchored on the first information given that the firm was going to save about half a million and he did not bother to the very authenticity of that exciting information.
Anchoring concept leads to bias decision making that can be very costly to the firm as the case study demonstrates. It is expected that the first information received to trigger research needs to verify what is already known. However, most employees just like the procurement offer always go for quick solutions, which are always very expensive.
The best way to address the problem is to look for additional information. Workers and management need to drop the mentality of anchoring heuristics as it limits reasoning (Montibeller & Von Winterfeldt, 2015). Anchoring concept may work positively to the firm and help save the management time and resources, however; chances are so high that its effect can be so expensive and as such must always be avoided by all means.
Conclusion
In conclusion, it is evident from the cases, and the three different scenarios that bias in decision-making is part of the problems that management encounter in their workplace. Managers are always very busy and as such are more likely to look for quicker ways of solving the challenges they face. As such, majority rely on shortcuts like the ones explained through anchoring, availability, and endowment effect, which lead to various forms of biases in decision making. Organizations that fail to identify such biases are more likely to lose their competitive advantage or even get into massive losses. However, having appropriate knowledge on how various concepts contribute to bias in decision-making will help address issues in a more different way. Such management and employees will always learn to make rational decisions that are backed up by wide research and not single instances or things that can be easily retrieved.
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