MBA Model. Cognitive biases in decision making

IV. CONTENTS

1 Introduction.
1.1 Explanation of MBA Model and Cognitive biases in decision making general

2 Cognitive biases in decision making.
2.1 Explanation.
2.2 How to use it
2.3 Examples of cognitive biases unconsciously in everyday life. 4,
2.4 Management misjudgements traced back to cognitive bias. 6,

3 Summary and Conclusion.

4 Bibliography.

I. ACKNOWLEDGEMENT

Thank you so much!

II. LIST OF FIGURES

Figure 1: Cognitive biases in decision making in practice at a company 3

Figure 2: Framing example of a burger4

Figure 3: Framing example of a bottle4

Figure 4: Sales in stores5

Figure 5: Disagreements between humans7

1 Introduction

1.1 Explanation of MBA Model and Cognitive biases in decision making general

Human's mind cannot grasp the causes of events in their completeness, but the desire to find those causes is implanted in man's soul. And without considering the multiplicity and complexity of the conditions any one of which taken separately may seem to be the cause, he snatches at the first approximation to a cause that seems to him intelligible and says: "This is the cause!".

There are many models and frameworks in use in the business world today, and it is hard to keep track of them all. The MBA Model is designed to provide people with a broad groundling in all the key aspects of business. It is a simplified version of something more complex – it helps to understand a specific phenomenon by identifying its key elements.

Management is the art of getting work done through others. It involves marshalling a set of resources to achieve desired objectives. Managers make decisions about allocating people and money in an effective way. There are many analytical tools to help decision making,

including decision trees and net present value analysis. Most decision making is not as rational as we might expect it to be.

Cognitive biases in decision making discusses why people often make snap judgements that are flawed, and how effective managers can overcome these biases to make better decisions.

The following work is based on the theoretical foundations of the MBA model

(25 need-to-know MBA models, Birkinshaw, 2017). After clarifying the basics in Part 1,

examples of Cognitive Biases will follow. In the end of the Scientific Report the

Management failure traced back to cognitive bias get explained.

2 Cognitive biases in decision making

2.1 Explanation

A cognitive bias is a systematic error in considering that happens when people are processing and translating information in the world around them. That affects the decisions and judgments that they make. The human brain is effective but subject to impediments.

Cognitive biases are often a result of the brain's attempt to simplify information processing. They may lead to inaccurate judgment, distortion of perception or counter intuitive elucidation.

Predispositions regularly work as rules of thumb that aid form sense of the world and reach choices with relative fast speed. 1

Cognitive biases come in many different forms. One affect is decision making - for example, the well-known tendency for groups to default into consensus or to fail to see the truth in assembled data. 2

Some of these biases are related to memory. The way human remembers an event may be biased for several reasons and that, in turn, can lead to biased thinking and decision-making.

Other cognitive biases might be related to problems with attention. Since attention is a limited resource, people must be selective about what they pay attention to in the world around them.

Because of this, subtle biases can creep in and influence the way people see and think about the world. The concept of cognitive bias was first introduced by researchers

Amos Tversky and Daniel Kahneman in 1972. 1

2.2 How to use it

The best way to use cognitive biases is by being aware of their existence. Afterward it is

important to take steps to avoid their damaging side effects, to make this more understandable an example follows.

The figure has been removed by the editors for copyright reasons

Figure 1: Cognitive biases in decision making in practice at a company 3

In a business meeting a manager ask the other manager to decide whether to go ahead with a

proposal to launch a new product. To make good decisions it is essential effective to ask the right questions. Some questions could be:

Did people have an opportunity to voice their concerns? Was the relevant information brought to bear on the discussion? Or did minority voices get drowned out?

Is there a reason to think that the people making the recommendation are suffering from bias, for example confirmation bias in their assessment of the potential market size, or are they trying to manipulate the group into a decision based on how they have framed the problem?

Based on this question analysis, it is the job of the manager to counter the biases that may be creeping in. For example, if a manager thinks someone is being selective with the data they are presenting, one way could be to ask an independent expert to provide their own set of data.

If a meeting has reached agreement too soon, on option is to call on someone to put forward a counterargument. One of the most important jobs of the chairman in a meeting, in fact, is to be conscious of these potential biases and to use his or her experience to avoid fatal errors. 2

2.3 Examples of cognitive biases unconsciously in everyday life

1.Framing

The framing effect is when our decisions are influenced by the way information is presented. Equivalent information can be attractive depending on what features are highlighted.

Figure 2 show an image of people flocking towards a burger that is 75% fat free over one that contains 25% fat. The burger seems healthier and more appealing through the framing effect. 4

The figures have been removed by the editors for copyright reasons

Figure 2: Framing example of a burger4

Figure 3: Framing example of a bottle4

2. Anchoring Bias

Anchoring bias is used to come to a more logical decision. When humans make a

decision, particularly without prior evidence, they often assign a strong level of significance to the first piece of information what they see.

The brain uses such information to make what our minds think is a logical estimate based on limited information. This effect can also occur when too much information are available.

Even though people may have a suitable level of detail to make an informed decision, the Anchoring Bias can have an overwhelming effect on people’s decision. 5

In Figure 4 there is a classic framing example how it is used every day in stores worldwide. 290 $ may appear like a high price, yet it seems like a bargain when the customer know that the same product would normally cost 400 $.

110 $ saving changes the perspective. This popular case is just the top of the iceberg. It is a

simple marketing trick to generate a higher profit.5

Figure 4 : Sales in stores 5

3. Confirmation bias

The confirmation bias is the tendency to process information by looking for or interpreting information that is consistent with one´s existing beliefs, and non-supportive information will be ignored. Existing beliefs can include one’s expectations in each situation and predictions about a particular outcome. People are especially likely to process information to support their own

beliefs when the issue is highly important or self-relevant.6

The figure has been removed by the editors for copyright reasons

Figure 5 : Disagreements between humans 7

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