21.08.2019
 Managing Biases in Proper Judgment Dissertation

SEP 2012 Managing Biases in Ideal Judgment

Taking care of Biases in Strategic Wisdom

Professor Ilya Strebulaev

© Ilya Strebulaev 2012

SEP 2012 Handling Biases in Strategic View

© Ilya Strebulaev 2012

SEP 2012 Managing Biases in Proper Judgment

Heuristics and Rules of thumb

• Persons rely on different heuristics when creating most decisions –Evolutionary sensible strategy –Helpful but can lead to severe mistakes –Can result in biases –People are unaware of employing heuristics more often than not –Why crucial to understand

• Can correct/debias yourself • Understand what others are doing in deciding on the actions/strategies

• Example: Reputation heuristic

–Which city provides a large population

• Detroit vs Milwaukee: 86% pertaining to Detroit

• Seattle versus Chandzyan: 62% for Chandzyan

– Of the people who joined U. S. High School: 55% – Of detroit (#18; 714, 000); Milwaukee (#28, 595, 000)

© Ilya Strebulaev 2012

SEP 2012 Handling Biases in Strategic Wisdom

Availability Heuristic

• Ease of recall/Retrievability

–Do more seven-letter words end with " ing” and have " n” in the sixth place? • Average " n”: 21% • Normal " ing” 27% • 77% replies: " ing”> ”n”

• Events readily " available” in storage have disproportionate influence

–E. g.: Getting insurance following earthquakes –E. g.: Gross annual evaluation: previous three months essential; bigger events more important than daily –E. g.: A subordinate whom works next to the manager's office will probably receive a even more critical review –E. g.: Successful investors are more likely to discuss experiences

© Ilya Strebulaev 2012

SEP 2012 Taking care of Biases in Strategic View

Availability Heuristic

• Lessons: Ask yourself if your recollections/data points which usually lead you to decide are really representative of the kind of pool details?

© Ilya Strebulaev 2012

SEP 2012 Managing Biases in Proper Judgment • Lisa can be thirty-three and is also pregnant for the first time. She is worried about birth defects such as Down problem. Her doctor tells her there is just one in 1, 000 probability that a girl of her age could have a baby with Down problem. Lisa remains anxious and decides to secure a test, known as the Triple Display screen. The test is moderately correct: When a baby has Straight down syndrome, quality delivers a positive result eighty six percent of the time. There is, yet , a small " false positive” rate: 5 percent of babies produce a confident result despite not having Straight down syndrome. Mack takes the Triple Display screen and gets a positive result for Straight down syndrome. With all this test result, what are the possibilities that her baby provides Down symptoms? 80 75 60 55 40 31 20 15 0 you 2 several 4 five

 0-20% chance  21-40% opportunity  41-60% chance  61-80% possibility  81-100% chance

© Ilya Strebulaev 2012

SEP 2012 Controlling Biases in Strategic Common sense

The Representativeness Heuristic

• " Bayesian”: Insensitivity to Base Rates

–Lisa and Down symptoms: 1 . seven percent –Prospective entrepreneurs spend too much time thinking about achievement and far not enough time thinking about the rate for people who do buiness failures –If an entrepreneur will remind a founder of Yahoo, a VC is more likely to fund –" Four out of 5 dental surgeons surveyed suggest sugarless chewing gum for their patients”

• View depends on previously formed stereotypes • Insensitivity to test size

© Ilya Strebulaev 2012

SEP 2012 Taking care of Biases in Strategic View

The Representativeness Heuristic

• Regression towards the mean

–Typical example: staff who works extremely well during evaluation afterwards performs even worse –Another standard example: the majority of projects cost more than primary budget • Only projects with great expected returning are acknowledged • Assignments with overoptimistic assumptions may feature great expected comes back

© Ilya Strebulaev 2012

SEP 2012 Managing Biases in Proper Judgment

What is the rule? Suggest additional sequences to find out

2-4-6

© Ilya Strebulaev 2012

SEP 2012 Handling Biases...