Cognitive Biases & Strategic Decision Making

Meghna Shetty14078

COGNITIVE BIASES• A pattern of deviation in judgment, whereby inferences about other people and

situations may be drawn in an illogical fashion. Individuals create their own "subjective social reality" from their perception of the input.

Suggests decision makers use heuristics to deal with bounded rationality. A heuristic is a rule of thumb to deal with complex situations. • If the heuristic is wrong, however, then poor decisions result from its use.

Systematic errors can result from use of an incorrect heuristic. • These errors will appear over and over since the rule used to make decision is

flawed.

TYPES OF COGNITIVE BIASES• The Prior Hypothesis Bias :Strong prior beliefs about a relationship

between variables and makes decisions based on these beliefs even when evidence shows they are wrong.• Escalating Commitment : Irrational responses based on feelings of

personal responsibility despite evidences of failure.

• Reasoning By Analogy :Use of simple analogies to make sense out of complex situations.

TYPES OF COGNITIVE BIASES (contd)…• Representativeness : The tendency to generalize from a small sample

or even a single vivid anecdote.

• Illusion Of Control :The tendency for human beings to believe they can control or at least influence outcomes that they clearly cannot.

• Availability Error: Arises from the pre-disposition to estimate the probability of an outcome based on how easy the outcome is to imagine.

TECHNIQUES TO IMPROVE DECISION MAKING• Devil’s Advocacy: Involves a plan and a critical analysis.

• Dialectical inquiry: Involves a plan and a counterplan that reflect plausible but conflicting courses of action. This can promote Strategical thinking

• Outside view: Requires planners to identify a reference class of analogues, past strategic initiatives and determine which of those have succeeded or failed and evaluate based on the prior initiatives.

Devil’s Advocacy v/s Dialectic Enquiry

Plan

Devil’s advocate

critiques the PlanReassess plan

Accept, modify, reject

Devil’s Advocacy Counterpla

n2

Dialectic EnquiryPlan

1

Debate Of the 2 plans

Re-assess planAccept 1 or 2 ,combine

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