Choosing the status quo saves energy. Another trap for forecasters takes the form of overcautiousness, or prudence. Making choices in a way that justifies past, flawed choices Example: Bankers who originate problem loans keep advancing more funds to the debtors, to protect their earlier decisions. For Constructed Response 3, have the students bring in examples of anchoring in print or online media. Examples of Anchoring Bias. These routines, known as heuristics, serve us well in most situations. Shoppers pour over endless sales ads, map their shopping routes and time their visits all for the chance to receive steep discounts. Position yourself to excel in your career by attending one of our professional development workshops. Think through your position before any negotiation begins in order to avoid being anchored by the other party’s initial proposal. Test estimates over a reasonable range to assess their impact. Overly confident about the accuracy of their predictions, most people set too narrow a range of possibilities. Widmar says the key is to ask yourself, “If I weren’t currently choosing this option, would I choose it from my alternatives?”. When information is given up front, that later affects the decision that is made. A marketer attempting to project the sales of a product for the coming year often begins by looking at the sales volumes for past years. These might seem like silly little experiments that psychologists do to try and suggest that people are idiots, but actually it’s showing us something fundamental about the way we think. So where do bad decisions come from? Anchoring Trap. Executives who attempt to familiarize themselves with these traps and the diverse forms they take will be better able to ensure that the decisions they make are sound and that the recommendations proposed by subordinates or associates are reliable. Anchoring Trap. are discussed in relation to the anchor. The status-quo trap biases us toward maintaining the current situation--even when better alternatives exist. Be particularly wary of anchors in negotiations. Consider the position with an open mind. Where do bad decisions come from? Without fail, the answers to the second question increase by many millions when the larger figure is used in the first que… The Anchoring Trap. Many people would first say, “Okay, where’s the stock today?” Then, based on where the stock is today, they will make an assumption about where it’s going to be in three months. What’s your best estimate of Turkey’s population? While you might expect that about half would have wanted to make the exchange, only one in ten actually did. … occurs when a person is influenced unconsciously by the initial piece of information (considered to be the Anchor), which in turn affects their final decision. Others take the form of biases. 1. The source of the status-quo trap lies deep within our psyches, in our desire to protect our egos from damage. But the two states framed the choice in very different ways: in New Jersey, you automatically got the limited right to sue unless you specified otherwise; in Pennsylvania, you got the full right to sue unless you specified otherwise. The keys to avoiding them are open-mindedness and critical thinking.“Carefully seek others’ input to compare and contrast with your own,” she says. As human beings, we get attached to things irrationally. But, even more dangerous, they can work in concert, amplifying one another. First of all, remember that in any given decision, maintaining the status quo may indeed be the best choice, but you don’t want to choose it just because it is comfortable. Because the media tend to aggressively publicize massive damage awards (while ignoring other, far more common trial outcomes), lawyers can overestimate the probability of a large award for the plaintiff. This sort of things is going on in loads of different … They proposed an initial price in the midrange of market rates and asked the owners to share in the renovation expenses, but they accepted all the other terms. What exactly is anchoring in negotiation, and how does it play out at the bargaining table?. In fact, research from Harvard … New product development, mergers and acquisitions, executive hirings—bad decisions about any of these can ruin your company and your career. The sunk-cost trap inclines us to perpetuate the mistakes of the past. Here are five of the nine traps: Giving disproportionate weight to the first information you receive Example: A marketer projects future product sales by looking only at past sales figures. That’s why pilots are trained to use objective measures of distance in addition to their vision. When faced with high-stakes decisions, we tend to adjust our estimates or forecasts “just to be on the safe side.” Many years ago, for example, one of the Big Three U.S. automakers was deciding how many of a new-model car to produce in anticipation of its busiest sales season. Anchoring and Ordering An anchor is a thing that serves as a reference point for our comparisons. What Is Anchoring Bias? For example, here’s how one successful entrepreneur crowdsourced lots of new business names and found a terrific new name for his business. A version of this article appeared in the. For a 4 bedroom, 5000 square foot home this may be a reasonable list price, but in the case of a one bedroom 1000 square foot house located in the country, this price point is absurd. If managers underestimate the high end or overestimate the low end of a crucial variable, they may miss attractive opportunities or expose themselves to far greater risk than they realize. Seek out and listen carefully to the views of people who were uninvolved with the earlier decisions and who are hence unlikely to be committed to them. The first frame, with its reference point of zero, emphasizes incremental gains and losses, and the thought of losing triggers a conservative response in many people’s minds. The psychological miscues cascade, making it harder and harder to choose wisely. The overconfidence trap makes us overestimate the accuracy of our forecasts. As our sunk costs mount, we become trapped, unable to find a propitious time to seek out a new and possibly better course. Breaking from the status quo means taking action, and when we take action, we take responsibility, thus opening ourselves to criticism and to regret. But any adverse effect of framing can be limited by taking the following precautions: Most of us are adept at making estimates about time, distance, weight, and volume. Smart Choices: A Practical Guide to Making Better Decisions, John S. Hammond, Ralph L. Keeney, and Howard Raiffa. The Status Quo Trap. So, for example, imagine that you are buying a new car. Although there are occasional genuine loss leaders, much of the value that customers perceive is based on little more than anchoring. This trap dominates all other alternatives in order to maintain the existing state … In this article, first published in 1998, John Hammond, Ralph Keeney, and Howard Raiffa examine eight psychological traps that can affect the way we make business decisions. Force yourself to choose. They were then told that they could easily exchange the gift they received for the other gift. Every competitor was promoting its toilet soaps through negatively framed messages. “Let’s not rock the boat right now,” the typical reasoning goes. The new banker was able to take a fresh, unbiased look at the merit of offering more funds. The status quo trap. First impressions matter. The confirming evidence trap refers to seeking out biased advice or information that supports a particular option, and discounting any opposing information. The way the human brain works can sabotage our decisions. This simple experiment illustrates anchoring – a common and sometimes harmful trap in decision making. If youre like most people, the figure of 35 million cited in the first question (a figure we chose arbitrarily) influenced your answer to the second question. The seller asks $450,000. A simple example is purchasing a home. They’re also susceptible to overconfidence. Don’t settle for a generic logo based on a template or one created by a computer. John S. Hammond is a consultant on decision making and a former professor at the Harvard Business School in Boston, Massachusetts. Worst-case analysis added enormous costs with no practical benefit (in fact, it often backfired by touching off an arms race), proving that too much prudence can sometimes be as dangerous as too little. The seller asks $450,000. The owner of a local marine-salvage company gives you two options, both of which will cost the same: Plan A: This plan will save the cargo of one of the three barges, worth $200,000. Examine why admitting to an earlier mistake distresses you. To minimize the distortion caused by variations in recallability, carefully examine all your assumptions to ensure they’re not unduly influenced by your memory. To aid in this navigation, we would do well to consider three helpful anchors: operating at the edge of chaos, learning to ask questions and listen to the answers, and deflating our egos. Hopkins studied the market. In rewarding people, look at the quality of their decision making (taking into account what was known at the time their decisions were made), not just the quality of the outcomes. Deep within our psyches, we are self-protective and risk-aversive. Yet, like most heuristics, it is not foolproof. A simple example is purchasing a home. To test the effect of knowledge of existence of anchoring, students were reminded of its existence. We all, for example, exaggerate the probability of rare but catastrophic occurrences such as plane crashes because they get disproportionate attention in the media. 193-195) Most decision makers have a strong bias towards choices that maintain the status quo. In one psychological study of this phenomenon, two groups—one opposed to and one supporting capital punishment—each read two reports of carefully conducted research on the effectiveness of the death penalty as a deterrent to crime. Decision makers display, for example, a strong bias toward alternatives that perpetuate the status quo. Always try to reframe the problem in various ways. For example, used car salesmen often use ‘anchors’ to start negotiations.