1. Judgment in Managerial Decision Making 8e Chapter 3 Common Biases
As noted previously, we tend to use heuristics, or rules of thumb, to reduce the complexity of our decisions.
Often, these heuristics allow us to make effective decisions in a short amount of time.
However, under the right set of circumstances they can also lead us into making biased decisions.
Avoiding the biases that come with the use of heuristics is so difficult that even the most intelligent people are prone to error.
Before introducing key biases, take a few minutes to answer the following questions. Write down your answers.
Copyright 2013 John Wiley & Sons

2. Problem 1: Causes of Death
Rank order causes of death
Estimate death rates
Rank
Cause of Death
Deaths in 2009
War and civil conflict
Nutritional deficiencies, including starvation
Respiratory infections, lung cancers, and lung diseases
This problem will require you to estimate death rates in Note that the world population was 6.7 billion in For this problem, please look at each cause of death in the second column.
First, rank order the causes of death from what you think is the most common (=1) to what you think is the least common (=5).
Second, give an estimate for the number of deaths that each cause was responsible for in 2009.

3. Problem 2: Words with “a”
What percentage of words in the English language begin with the letter “a”?
For this problem, give your best estimate of the percentage of words in the English language that begin with the letter “a”.

4. Problem 3: Words with “a”
What percentage of words in the English language have the letter “a” as their third letter?
For this problem, give your best estimate of the percentage of words in the English language that have “a” as their third letter.

5. Lisa is 33 and is pregnant for the first time
Lisa is 33 and is pregnant for the first time. She is worried about birth defects such as Down syndrome. Her doctor tells her that she need not worry too much because there is only a 1 in 1,000 chance that a woman of her age will have a baby with Down syndrome. Nevertheless, Lisa remains anxious about this possibility and decides to obtain a test, known as the Triple Screen, which can detect Down syndrome. The test is moderately accurate: When a baby has Down syndrome, the test delivers a positive result 86% of the time. There is, however, a small “false positive” rate: 5% of babies produce a positive result despite not having Down syndrome. Lisa takes the Triple Screen and obtains a positive result for Down syndrome. Given this test result, what are the chances that her baby has Down syndrome?
- For this problem, estimate the probability that Lisa’s baby has Down syndrome.

6. A certain town is served by two hospitals
A certain town is served by two hospitals. In the larger hospital, about 45 babies are born each day. In the smaller hospital, about 15 babies are born each day. As you know, about 50 percent of all babies are boys. However, the exact percentage of boys born varies from day to day. Sometimes it may be higher than 50 percent, sometimes lower.
For a period of one year, each hospital recorded the days in which more than 60 percent of the babies born were boys. Which hospital do you think recorded more such days?
The larger hospital
The smaller hospital
About the same (within 5 percent of each other)
For this problem, estimate which hospital has more days with at least 60% of all births being to boys.

7. Problem 6: Having a Baby
You and your spouse have had three children together, all of them girls. Now that you are expecting your fourth child, you wonder whether the odds favor having a boy this time. What is the best estimate of your probability of having another girl?
6.25% (1 in 16) – odds of getting 4 girls in a row
50% (1 in 2) – equal chance of getting either
Something in between ( %)
For this problem, give your best estimate of the percentage of words in the English language that have “a” as their third letter.

8. Problem 6: Having a Baby
You and your spouse have had three children together, all of them girls. Now that you are expecting your fourth child, you wonder whether the odds favor having a boy this time. What is the best estimate of your probability of having another girl?
6.25% (1 in 16) – odds of getting 4 girls in a row
50% (1 in 2) – equal chance of getting either
Something in between ( %)
For this problem, give your best estimate of the probability of giving birth to a girl.

9. Problem 7: Batting Averages
Predict 2011 batting averages
Player
2010 Batting Average
Estimated 2011 Batting Average 1
.284 2
.265 3
.359 4
.291 5
.318 6
.286 7
.277 8
.155 9
.212
Suppose you are the general manager of a baseball team and you need to predict how well your players will fare in 2011.
Estimate the batting averages of your players in 2011 given their 2010 averages.

10. Problem 8: Describe Linda
Linda is 31 years old, single, outspoken, and very smart. She majored in philosophy. As a student, she was deeply concerned with issues of discrimi­nation and social justice, and she participated in antinuclear demonstrations.
___Linda is a teacher in elementary school.
___Linda works in a bookstore and takes yoga classes.
___Linda is active in the feminist movement.
___Linda is a psychiatric social worker.
___Linda is a member of the League of Women Voters.
___Linda is a bank teller.
___Linda is an insurance salesperson.
___Linda is a bank teller who is active in the feminist movement.
Consider this description of a hypothetical person named Linda.
Given the description of Linda, rank the eight possible descriptions in order of the probability that they describe Linda.

11. Problem 9: Guess the Date
Write the last three digits of your phone number and add 1 to the front of the string, as if it were a year: _________
Was the Taj Mahal completed before or after the date formed by your phone number?
___Before ___After
What year was the Taj Mahal completed?
____________
For this problem, follow a series of steps.
First, write the last three digits of your phone number.
Place a one in front of these three digits.
You have a number that looks like it could be a year.
Now, indicate whether you think the Taj Mahal was founded before or after the date formed by your phone number.
Finally, estimate the actual year in which you think the Taj Mahal was completed.

12. Problem 10: Which is More Likely?
Drawing a red marble from a bag containing 50% red marbles and 50% white marbles.
Drawing a red marble seven times in succession, with replacement, from a bag containing 90% red marbles and 10% red marbles.
Drawing at least one red marble in seven tries, with replacement, from a bag containing 10% red marbles and 90% white marbles.
For this problem, estimate which event is the most likely.
Then, estimate which event is the second-most likely.

13. Problem 10: Which is More Likely?
Drawing a red marble from a bag containing 50% red marbles and 50% white marbles.
Drawing a red marble seven times in succession, with replacement, from a bag containing 90% red marbles and 10% red marbles.
Drawing at least one red marble in seven tries, with replacement, from a bag containing 10% red marbles and 90% white marbles.
For this problem, estimate which event is the most likely.
Then, estimate which event is the second-most likely.

14. Problem 1 Answers Rank order causes of death Estimate death rates Rank
Cause of Death
Deaths in 2009 3
War and civil conflict
182,000 2
Nutritional deficiencies, including starvation
418,000 1
Respiratory infections, lung cancers, and lung diseases
3.5 million
Now, look back at your answers to Problem 1.
It is likely that you underestimated the number of people dying from pneumonia, as the vivid deaths resulting from war and starvation that gain the attention of the press tend to be more available in your mind.

15. Answers: Problems 2 and 3
What percentage of words in the English language begin with the letter “a”? 6% What percentage of words in the English language have the letter “a” as their third letter? 9%
You were given two problems where you had to estimate the number of letters in the English language beginning with “a” and with “a” as the third letter.
You likely estimated that the number of words beginning with “a” exceed the number of words with “a” as the third letter.
This is because we are better at retrieving words beginning with the letter “a” than words with “a” as the third letter.

16. The Availability Heuristic
Ease of Recall Bias
Vividness influences recall
Estimating death rates
Airline security decisions
Familiarity of names
Performance evaluations
Retrievability Bias
Ease of retrieval from memory
Words with “a”
“n” as sixth letter versus ending in “ing”
Geographic concentration of similar businesses
Hiring decisions
The three problems we just reviewed are all prone to error as the result of the availability heuristic.
The availability heuristic is the tendency to think that the most available information in mind is representative of the larger pool of possible events that exists in the world.
When we use the availability heuristic, we can be very prone to error, as our memory is often influenced by information that is unrelated to actual base rates.
There are two forms of the availability heuristic:
Ease of Recall Bias is the tendency to use the vividness of a memory as a proxy for its likelihood.
This is why you probably underestimated the number of people who die from lung issues relative to the number of people dying in war or from starvation, as the news tends to report stores about war, atrocities in other nations, and starving children while neglecting stories about people dying from lung cancer.
After a single terrorist attempted to ignite explosives in his shoes, all people going through airport security now have to take their shoes off even though this was a single event and terrorist could presumably hide explosives almost anywhere else on them.
When we hear the names of famous men and then the names of ordinary women, we tend to incorrectly believe that we heard more names of men than of women because we tend to only remember the famous names that we heard.
When managers evaluate employee performance, they are likely to be more influenced by performance in the past six months than in the previous six months.
Retrievability bias is the tendency to estimate the probability of events on the basis of how easily we can retrieve information from our memory.
When asked to estimate the number of words starting with “a”, you probably had an easier time recalling words starting with “a” than recalling words with “a” as the third letter, which likely biased your judgment.
In a similar study, people indicated that more seven-letter words end in “ing” than have “n” as the sixth letter. However, this is logically not possible because all seven-letter words ending in “ing” have “n” as the sixth letter and of all seven-letter words ending in anything other than “ing”, some will inevitably have “n” as the sixth letter.
Retrievability is one reason why similar business tend to be located in the same areas: if there are more similar businesses in an area, people are more likely to recall at least one business in the area, which can draw customers to all of the businesses.
Managers often hire people they remember meeting through their professional connections or their friends. This means that they may often miss out on the most qualified candidates. This practice also tends to promote hiring discrimination since managers, who are predominately white and male, are the most likely to recall other white males in their professional networks.

17. Lisa is 33 and is pregnant for the first time
Lisa is 33 and is pregnant for the first time. She is worried about birth defects such as Down syndrome. Her doctor tells her that she need not worry too much because there is only a 1 in 1,000 chance that a woman of her age will have a baby with Down syndrome. Nevertheless, Lisa remains anxious about this possibility and decides to obtain a test, known as the Triple Screen, which can detect Down syndrome. The test is moderately accurate: When a baby has Down syndrome, the test delivers a positive result 86% of the time. There is, however, a small “false positive” rate: 5% of babies produce a positive result despite not having Down syndrome. Lisa takes the Triple Screen and obtains a positive result for Down syndrome. Given this test result, what are the chances that her baby has Down syndrome? 1.7%
Recall your answer to Problem 4. You were asked to indicate the likelihood of a mother’s child having Down syndrome.
You likely overestimated the probability that a positive test indicates that Lisa’s baby has Down syndrome.

18. Per 1,000 women Lisa’s age, 999 do not have a baby with Down syndrome.
5% of women with a baby that does not have Down syndrome will receive a false positive test.
999 * .05 = women per 1,000 receive a false positive.
86% of babies with Down syndrome test positive the first time.
.86*1 = .86 per 1,000 women with a Down syndrome baby receive an accurate positive test
.86/( ) = 1.7% of women who receive a positive test have a baby with Down syndrome
In order to illustrate why you probably overestimated Lisa’s probability of having a baby with Down syndrome, let’s walk through the correct way to compute the probability.
First, we know that Lisa only has a 1/1000 chance of having a baby with Down syndrome given her age. This means that for every 1,000 women, 999 will have a baby that does not have Down syndrome.
Second, we know that 5% of all babies who test positive for Down syndrome do not actually have Down syndrome.
Thus, per 1,000 women, receive a false positive test.
We also know that 86% of babies with Down syndrome test positive.
This means that per every 1,000 women, .86 babies that actually have Down syndrome will test positive.
Thus, per 1,000 women Linda’s age, .86 will receive an accurate positive test and will receive a false positive.
Overall, this means that only 1.7% of women who test positive actually have a baby with Down syndrome.
You likely missed this problem because you failed to account for the fact that only 1/1,000 women Linda’s age receive an accurate false positive.

19. A certain town is served by two hospitals
A certain town is served by two hospitals. In the larger hospital, about 45 babies are born each day. In the smaller hospital, about 15 babies are born each day. As you know, about 50 percent of all babies are boys. However, the exact percentage of boys born varies from day to day. Sometimes it may be higher than 50 percent, sometimes lower.
For a period of one year, each hospital recorded the days in which more than 60 percent of the babies born were boys. Which hospital do you think recorded more such days?
The larger hospital
The smaller hospital
About the same (within 5 percent of each other)
Recall your answer to Problem 5. You likely chose option c.
However, you probably failed to account for sample sizes. Because the smaller hospital has fewer babies born each day than the larger hospital, it is going to have more daily fluctuation in the percentage of boys and girls born each day even though in the long run, they should each produce a 50/50 split.

20. Problem 6: Having a Baby
You and your spouse have had three children together, all of them girls. Now that you are expecting your fourth child, you wonder whether the odds favor having a boy this time. What is the best estimate of your probability of having another girl?
6.25% (1 in 16) – odds of getting 4 girls in a row
50% (1 in 2) – equal chance of getting either
Something in between ( %)
Recall your answer to Problem 6.
Many people tend to assume that because they have already had 3 girls, they are somehow less likely to have another girl than they were when having the first baby.
It is true that overall, there is only a 1 in 16 chance of giving birth to 4 girls in a row, but each birth is independent. Because we are looking only at the probability of having a fourth girl and not on the probability of having four girls overall, the correct answer is 50%. However, many people miss this problem because they fail to account for the independence of each birth.

21. Problem 7: Batting Averages
Texas Rangers: 2010 and 2011
Player
2010 Batting Average
2011 Batting Average
Michael Young
.284
.338
Elvis Andrus
.265
.279
Josh Hamilton
.359
.298
David Murphy
.291
.275
Nelson Cruz
.318
.263
Ian Kinsler
.286
.255
Andres Blanco
.277
.224
Taylor Teagarden
.155
.235
Craig Gentry
.212
.271
Recall your answers to Problem 7.
In order to illustrate how batting averages typically fluctuate from one year to the next, you were presented with the actual 2010 batting averages of nine players on the 2010 Texas Rangers.
All nine of these players also played for the Rangers in 2011.
The correlation in performance from one year to the next is .41, very close to the correlation for the league overall.
While .41 is not a bad correlation, there is clearly a lot of variance in performance from one year to the next.
Often what happens is that the top performers one year perform worse the next year and the worst performers one year perform better the next year. This is called regression to the mean.
For example, consider Josh Hamilton. Hamilton led all qualifying Major League baseball players with a .359 average in 2010, but in 2011, he saw his average drop all the way down to Though this is still a very good batting average, Hamilton’s drop in batting average illustrates how difficult it is for the best performers to repeat their performance from one year to the next.
Had you simply guessed that each player would perform at the team average, you would not have had a bad set of estimates.
If you took each player’s 2010 batting average and averaged it with the team’s 2010 batting average, you would have had very accurate estimates.

22. Problem 8: Describe Linda
Linda is 31 years old, single, outspoken, and very smart. She majored in philosophy. As a student, she was deeply concerned with issues of discrimi­nation and social justice, and she participated in antinuclear demonstrations.
___Linda is a teacher in elementary school.
___Linda works in a bookstore and takes yoga classes.
___Linda is active in the feminist movement.
___Linda is a psychiatric social worker.
___Linda is a member of the League of Women Voters.
___Linda is a bank teller.
___Linda is an insurance salesperson.
___Linda is a bank teller who is active in the feminist movement.
Recall your answers to Problem 8, where you had to rank the likelihood of descriptions about a person named Linda.
Though there is no way to have an objectively correct answer for this problem, there is one error that is commonly made.
When ranking the likelihood of descriptions for Linda, you may have ranked “Linda is a bank teller who is active in the feminist movement” as being more likely than “Linda is active in the feminist movement” and/or that “Linda is a bank teller”. This is because the combination of being a bank teller and active in the feminist movement is easier for you to picture in your mind than either of these descriptions are alone.
However, it is necessarily the case that the probability of only one of the descriptions is more likely than both of them in combination.

23. The Representativeness Heuristic
Insensitivity to base rates
Insensitivity to sample size
Misconceptions of chance
Regression to the mean
The conjunction fallacy
Errors in solving the problems we just went over stem from the representativeness heuristic.
The representativeness heuristic is the tendency to assume that the likelihood of a specific occurrence is related to the likelihood of similar occurrences.
While this heuristic often serves us well, it can lead to errors in circumstances like the ones we just explored.
Five consequences of the representativeness heuristic are that:
We are insensitive to base rates. When people estimate the likelihood of a baby having Down syndrome given a positive test result, they often neglect the fact that the mother’s age makes her unlikely to have a baby with Down syndrome.
We are relatively insensitive to sample sizes. Many people fail to account for the fact that a small hospital will have more days with 60% of births being to boys than a large hospital due to the simple fact that small sample sizes produce more variation.
We often apply the wrong probability rules to the wrong situations. This is why many people think that a couple giving birth to three girls in a row have less than a 50% chance of having another girl, as they tend to assume that a boy is more than 50% likely to be the next birth even though each single birth has a 50/50 chance at being a boy or girl.
People often assume that performance one year is the best predictor of performance the following year. However, they often fail to account for the fact that the best and the worst performers tend to see their performances regress towards the mean performance level.
People often think that the more easily they can visualize a person’s description, the more likely the description is to be indicative of the person. However, combining related attributes tends to make things more easy to visualize and in cases where you are comparing a single attribute to the same attribute combined with some other related attribute, it is necessarily the case that the single attribute in isolation is more likely to describe a person than the combination of the single attribute and the related attribute. However, because combined attributes tend to make things more easy to visualize, people often think that the combined attributes are more likely than one of them in isolation.

24. Problem 9: Guess the Date
Write the last three digits of your phone number and add 1 to the front of the string, as if it were a year: _________
Was the Taj Mahal completed before or after the date formed by your phone number?
___Before ___After
What year was the Taj Mahal completed?
1648
Recall your answers to problem 9.
First, you had to give the last three digits of your phone number and then add a 1 to the beginning.
Next, you had to indicate whether the date formed by these numbers is before or after the completion of the Taj Mahal.
Finally, you had to guess the year that the Taj Mahal was completed.
While not many people give the correct year in which the Taj Mahal was founded, they often are biased by the arbitrary date derived from their phone number.
By asking you to consider whether the date of the Taj Mahal’s founding is before or after the date formed by your phone number, the question is focusing you on this arbitrary date as a starting point to use in guessing the Taj Mahal’s completion.
Unfortunately, we are typically influenced by arbitrary starting points and this can lead our estimates to be biased in one direction or another.
So, you may have been accurate at guessing whether the arbitrary date derived from your phone number is before or after the completion of the Taj Mahal, but you likely did not adjust far enough in one direction or another.
That is, if you guessed that the Taj Mahal was founded before your arbitrary date, you likely did not adjust downward enough and you probably guessed a date after If you guessed that the Taj Mahal was founded after your arbitrary date, you likely did not adjust upward enough and you probably guessed a date after 1648.

25. Problem 10: Which is More Likely?
Drawing a red marble from a bag containing 50% red marbles and 50% white marbles.
Drawing a red marble seven times in succession, with replacement, from a bag containing 90% red marbles and 10% red marbles.
Drawing at least one red marble in seven tries, with replacement, from a bag containing 10% red marbles and 90% white marbles
Recall Problem 10, where you were asked to rank the likelihood of several events occurring.
C is the most likely (52% chance).
A is the second-most likely (50% chance).
B is the least likely (48% chance).
However, most people actually think that the opposite pattern is the correct ordering of likelihood.
This happens because people overestimate the likelihood of events that occur in conjunction and underestimate the likelihood of events that occur in isolation from one another.
For example, in Option B, people tend to think that because the likelihood of drawing one red marble is very likely (90%), the likelihood of drawing seven red marbles in a row must be high as well. However, because you must multiply a probability of .9 by itself seven times to estimate the probability of seven red marbles being drawn in a row, you end up with a probability that is less than 50%. Though a single event may be likely, the more that event must happen consecutively, the less likely it becomes.
People often think that option C is the least likely because it is difficult to visualize a single red marble being drawn even though there are seven attempts to draw the marble. Because the probability of drawing a white marble seven times in a row is 48%, the probability of drawing at least one marble is 52%.

26. The Confirmation Heuristic
Seeking to confirm prior information
Anchoring
Arbitrary starting points
Achievement tests for children
First impressions
Stereotypes
Conjunctive and disjunctive events bias
The two problems we just reviewed are likely to result in errors that stem from the confirmation heuristic.
The confirmation heuristic is the general tendency to make judgments by confirming prior information or beliefs rather than seeking to find evidence that disconfirms these beliefs.
In anchoring, we tend to use an arbitrary starting point and adjust from that starting point after deciding whether we should adjust upward or downward. However, we would be more accurate if we never allowed the arbitrary starting point to influence our decision-making in the first place. Here are some other examples of the anchoring:
Children who score well on achievement tests at a young age are given more attention from their teachers because they are expected to perform better than those who score poorly on achievement tests, even if the test was arbitrary and the children had no difference between them in the first place.
People often fail to adequately adjust their opinions from the first impressions they form of others.
People often hold stereotypes about social groups and despite efforts to adjust from their stereotypes when considering individual members of the social groups, they often do so insufficiently.
In the last problem we reviewed, it is likely that you failed to adequately adjust from a single event with a high probability to multiple consecutive events with a much lower probability. You also probably did the opposite when adjusting from a single event with a low probability to multiple opportunities for the single event to occur that give the event a much higher probability of occurring.
This reflects the general tendency to overestimate the likelihood of high probability events occurring consecutively and to underestimate the probability of a low probability event occurring once over many attempts.

27. Summary Heuristics simplify our decisions Often, they save us time
We don’t apply them appropriately
Today, we reviewed a series of common heuristics.
Heuristic are intuitive rules of thumb that we use to simply our decisions.
Often, they save us time and are quite useful.
However, in many cases, they can bias our decision-making and lead to costly mistakes. Unfortunately, we are not good at distinguishing between the situations when heuristics are useful and when they can lead us astray.
By recognizing the situations in which we are likely to misapply heuristics, we can take action to correct our initial biased judgments based on intuition in favor of more accurate judgments based on systematic thought.