Representativeness and framing bias occurs when the way information is presented alters the decision an individual will make.
Satisficing occurs when individuals settle for the first acceptable alternative instead of seeking the best possible (optimal) decision.
Anchoring and adjustment bias occurs when individuals react to arbitrary or irrelevant numbers when setting financial or other numerical targets. For example, it is tempting for college graduates to compare their starting salaries at their first career job to the wages earned at jobs used to fund school. Comparisons to siblings, friends,
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parents, and others with different majors are also very tempting while being generally irrelevant. Instead, research the average starting salary for your background, experience, and other relevant characteristics to get a true gauge. This bias could undermine firm performance if executives make decisions about the potential value of a merger or acquisition by making comparisons to previous deals rather than based on a realistic and careful study of a move’s profit potential (Table 10.9 “Decision Biases”).
The availability bias occurs when more readily available information is incorrectly assessed to also be more likely. For example, research shows that most people think that auto accidents cause more deaths than stomach cancer because auto accidents are reported more in the media than deaths by stomach cancer at a rate of more than 100 to 1. This bias could cause trouble for executives if they focus on readily available information such as their own firm’s performance figures but fail to collect meaningful data on their competitors or industry trends that suggest the need for a potential change in strategic direction.
The idea of “throwing good money after bad” illustrates the bias of escalation of commitment, when individuals continue on a failing course of action even after it becomes clear that this may be a poor path to follow. This can be regularly seen at Vegas casinos when individuals think the next coin must be more likely to hit the jackpot at the slots. The concept of escalation of commitment was chronicled in the 1990 book Barbarians at the Gate: The Rise and Fall of RJR Nabisco. The book follows the buyout of RJR Nabisco and the bidding war that took place between then CEO of RJR Nabisco F. Ross Johnson and leverage buyout pioneers Henry Kravis and George Roberts. The result of the bidding war was an extremely high sales price of the company that resulted in significant debt for the new owners.
Providing an excellent suggestion to avoid a nonrational escalation of commitment, old school comedian W. C. Fields once advised,
“If at first you don’t succeed, try, try again. Then quit. There’s no point being a damn fool about it.”