Introduction

Lesson Overview

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As mentioned in the material from Lesson 1, decision making often suffers from the presence of certain types of biases that lead to questionable, if not erroneous, judgments of two kinds: probability (or likelihood) and value. For instance, the CEO of a company interested in a possible acquisition might seriously overestimate the likelihood that the acquisition would have a positive payoff for his or her company (probability), as well as what expanding operations would do for its long-range economic health (value). The CEO enters into negotiations, makes the acquisition, and later discovers that the action has proved to be a boondoggle--a complete waste of time. This lesson and the next one are both concerned with the first type of judgment (probability) and the mental shortcuts decision makers indulge in; these heuristics can distort estimates of the likelihood of particular outcomes the choices made. Lesson 2 deals specifically with a variety of biases stemming from the two categories of such shortcuts: the “Availability Heuristic” and the “Representativeness Heuristic.”

Reading Assignment

• Judgment in Managerial Decision Making, "Common Biases," (pp. 31-46).

Lesson Objectives

The reading, overview of key ideas, and thought questions in this lesson will help you to:

• understand how the availability and representativeness heuristics can lead to biased estimates of probability, or systematic deviations from warranted estimates;
• identify several species of biases that stem from the two types of heuristics;
• appreciate the connection of the biases to problematic decision making; and
• relate your understanding of the forms to your own decision making, as well as to that of others.

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