Module 2 – Case
DECISION-MAKING BIASES AND PITFALLS
Case Assignment
Even the most intelligent manager is prone to personal
biases and pitfalls that can lead to bad decisions. We all carry biases based
on our personal experiences. And we can all fall into various traps that lead
to decisions that seem perfectly logical at the time but in retrospect, we see
that we should have known better.
In the background materials, including Bolland and Fletcher
(2012); Kourdi (2003); and Hammond, Keeney, and Raiffa (2008); several specific
decision-making biases and pitfalls are discussed. Collectively these are known
as cognitive biases. Some of the common pitfalls and biases discussed in these
readings include overconfidence bias, confirmation (self-confirming) bias,
sunk-cost bias, framing bias, and hindsight bias.
Carefully review all three of these readings and make sure
you understand the different types of biases. Then read through the scenarios
below and think about what kind of biases are demonstrated in each scenario.
For each scenario, carefully explain which specific bias or biases is
demonstrated by the decision and what can be done to avoid this bias in the
future. Make sure to pick at least one specific bias that you read about for
each scenario, and explain your reasoning. Use references to at least one of
the three required readings from the background materials in your discussion of
each scenario below. Your paper should be 4–5 pages in length:
The Chief Financial Officer (CFO) of a corporation is of the
strong belief that marketing is not a good use of the company’s money. Someone
shows her data from several years ago showing that during a period of high
spending on marketing, sales did not go up. She says, “See, I told you
marketing is not a good use of our budget!” and cuts the marketing budget to
almost zero. Following the cut in the marketing budget, sales also start to
drop dramatically. When asked by an employee if the drop in sales is due to the
cut in the marketing budget, she says, “No!” and insists there must be a
different explanation. What kind of decision-making bias do you think this
represents, and why? What steps would you recommend to this CEO to reduce this
kind of bias? Support your answer with references to at least one of the three
background readings.
A CEO decides that he wants to greatly expand the company’s
market by purchasing a major rival. This acquisition would double the company’s
market share. However, several of his top managers warn him that such a
purchase would require the company to take out a huge amount of debt to finance
this merger, and that many of these large mergers have failed. They also point
out that the organizational culture of the other company is very different and
that managing this merger would be very difficult. Nonetheless, the CEO insists
that he can overcome the odds and plans to go through with the merger. What
kind of decision-making bias do you think this represents, and why? What steps
should this leader take to avoid this bias? Support your answer with references
to at least one of the three background readings.
A CEO wants to purchase a new factory. He is currently
deciding between two factories. The owner of Factory A brags that 94% of
products produced at the factory are free of defects. The owner of Factory B
cautions that his factory has a 5% defect rate but management and staff are
working very hard to reduce the rate. The CEO decides to purchase Factory A
citing its strong 94% rate of success in producing defect-free products even
though Factory B actually has a 95% rate of success. What kind of
decision-making bias do you think this represents, and why? What steps should
this leader take to avoid this bias?
A CEO of an automobile company decides to introduce a new
hybrid vehicle using cutting-edge technology. A huge amount of money is spent
in research and development as well as advertising. But when the car is
completed sales are very slow and the price has to be cut so low that the
company is losing money on every hybrid vehicle sold. She is advised to simply
abandon the car to avoid further losses in profits, and focus her energy on
selling profitable vehicles. However, she insists it is unwise to abandon the
hybrid vehicle given that so much money has already been put into the project.
What kind of decision-making bias do you think this represents, and why? What
steps should this leader take to avoid this bias? Support your answer with
references to at least one of the three background readings.
Conclude the paper with a discussion about which one of the
decision-making biases you think is the most dangerous to a leader, and explain
your reasoning.
Assignment Expectations
Follow the assignment instructions closely and follow all
steps listed in the instructions.
Stay focused on the precise assignment questions; don’t go
off on tangents or devote a lot of space to summarizing general background
materials.
Make sure to cite readings from the background materials
page. Rely primarily on the required background readings as your sources of
information.
Include both a bibliography and in-text citations. See the
Student Guide to Writing a High-Quality Academic Paper, including pages 13 and
14 on in-text citations.
