The psychology of decision making

Audiences

1

The Psychology of Decision Making

Lars [email protected]@LarsSudmann

Audiences

Organization Science Lecturer

Organizational Advisor

Kahnemann, Daniel: e.g. Thinking Fast & Slow

Plous, Scott: The Psychology of Decision Making

Sudmann, Lars / Lenzen, Wolfram: Die Psychologie der Krise, Controller Magazin

Audiences „Led“Leader

Organization Science Lecturer

Organizational Advisor

Why do projects fail?

Source: Hays, 27.12.12, in %, combination of “fully agree” and “mostly agree”

Understand key drivers of human decision making…

…and its implication on how we approach decision making

Psychological Pitfalls

Anchoring

Over-confidence

Loss aversion

Confirmation bias& data availability

Mental Accounting &

Sunk Cost

Psychological Pitfalls

Anchoring

Over-confidence

Loss aversion

Confirmation bias& data availability

Mental Accounting &

Sunk Cost

Mental Accounting and Sunk Cost

Theatre questions (1 and 7)

The man with the horse (11)

What outcome can still change?

Only take this into account!

Strategic = Be careful!

Psychological Pitfalls

Anchoring

Over-confidence

Loss aversion

Confirmation bias& data availability

Mental Accounting &

Sunk Cost

Data Availibility & Confirmation Bias

Linda the bank teller (2);

The cards E, 4, 7, K (10) ?

There are 12 cows, 4 sheep, and 8 pigs onboard a ship

What is the captain’s age?

16

Ask: I am looking at the total picture?

17

Ask for the right data, not only the easy data

Get experts with experience on the subject in the room

Psychological Pitfalls

Anchoring

Over-confidence

Loss aversion

Confirmation bias& data availability

Mental Accounting &

Sunk Cost

Overconfidence

Linda the bank teller (2)

The estimate of driving qualities (9)?

Source: Asch, S.E. 1956 – A minority of one against a unanimous majority.

23

Take the worst case – and add 50%

24

Avoid the HIPPO syndrom

25

Have your decision peer-reviewed

Install Devil’s Advocate Positions

Psychological Pitfalls

Anchoring

Over-confidence

Loss aversion

Confirmation bias& data availability

Mental Accounting &

Sunk Cost

Loss Aversion

Two questions with 1000 and 2000 Euro (3 and 8)?

Install Data Frames & Decision Trees

Psychological Pitfalls

Anchoring

Over-confidence

Loss aversion

Confirmation bias& data availability

Mental Accounting &

Sunk Cost

Anchoring

Jim and Kathy (4 and 12)

Bangladesh (5 and 6)?

Write down the last three digits of your phone number

When did Genghis Khan die?Year of death _____________

Left side Close your Eyes

Right side Close your Eyes

All Close your Eyes

Be careful with first numbers & first impressions

Do scenarios, test different reference points

Psychological Pitfalls

Anchoring

Over-confidence

Loss aversion

Confirmation bias& data availability

Mental Accounting &

Sunk Cost

Exploration

Psychological Pitfalls

Anchoring

Over-confidence

Loss aversion

Confirmation bias& data availability

Mental Accounting &

Sunk Cost

45

“Irrational decisions are almost always caused by fear. If you want to change the behavior, address the fear.”

Seth Godin, author

What kills more people:

a) coconuts falling from trees

b) or sharks?

If you were given a choice, which of the following gambles would you prefer?

a) €1,000,000 for sure

b) 10 % chance of getting €2,500,00089 % chance of getting €1,000,000

1 % chance of getting €0

#Tool

Awareness – Emotions at work!

49

Tocky, http://www.nandahome.com/

50

#1 Strategic: careful

#2 Look at the total picture

#3 Right data, not easy data

#4 Get experts in the room

#5 Take worst case – add 50%

#6 Peer-review decisions

#7 Install Devil’s advocate positions

#8 Decision frameworks

#9 Rethink First Impressions

#10 Use ranges & scenarios

“Both optimists and pessimistscontribute to our society.The optimist invents the airplaneand the pessimist, the parachute.”

-G.B. Stern

Be a realist when making a decision and an optimist when implementing it – not the other way around.