Biases: Experimental Results

1. Judgment and Decision Making in Information Systems Biases: Experimental Results Yuval Shahar M.D., Ph.D.

2. Sunk Cost • A sample (N=24) of 4th year and M.Sc. Information Systems Engineering students in a Decision Making and Human Judgment course • As the president of an airline company, you have invested $10 million of the company's money into a research project. The purpose was to build a plane that would not be detected by conventional radar. When the project is 90% completed, another firm begins marketing a plane that cannot be detected by radar. Also, it is apparent that their plane is much faster and far more economical than the plane your company is building. The question is: should you invest the last 10% of the research funds to finish your project? (N=24) • 1. NO - it makes no sense to continue spending money on the project (15/24) • 2. Yes - as long as $10 million is already invested, I might as well finish the project (9/24)

3. Availability • In your opinion, which is a more likely cause of death in the US (N=24): • 1. Falling airplane parts (14/24) (True: 30:1) • 2. Sharks (10 /24) • In your opinion, which is the cause of death that is more common in the US (N=24): • 1. Diabetes (SUKERET in Hebrew) (9 /24) (True: 2:1) • 2. Homicide (15 /24) • In your opinion, which is the cause of death that is more common in the US (N=24): • 1. Tornado (17 /24) • 2. Lightning (7 /24) (True) • In your opinion which, is the cause of death that is more common in the US (N=24): • 1. Car accidents (21 /24) • 2. Stomach cancer (3 /24) (True: 2:1)

4. Availability • Consider the two structures, A and B, which are displayed below: A. xxxxxxxx B. xx xxxxxxxx xx xxxxxxxx xx xx xx xx xx xx xx A path is a line that connects an X in the top row of a structure to an X in the bottom row by passing trough one (and only one) X in each row. In other words, a path connects three X's in structure A (one in each of the three rows), and nine X's in structure B (one in each of the three rows). One example of a path is drawn in each structure above. • In which of the two structures are there more paths ? (N=24) • 1. Structure A (17/24) (Actually 512) • 2. Structure B (7/24) (Actually 512)

5. Representation • The mean IQ of the population of eighth graders in a city is known to be 100. You selected a random sample of 50 children for a study of educational achievements. The first child tested has an IQ of 150. What do you expect the mean IQ to be for the whole sample ? (N=24) • Answer: (150+49x100)/50 = 5050/100 = 101 (3/24)

6. Anchoring • If all the human blood in the world were poured into a cube-shaped tank, how wide would the tank be ? (N=24) • Correct answer: Volume  6000M people x 5000 cc = 30 x 1012 cc  (3x104 cm)3 = (300m )3 • (0/24 answered in the range 200-600M) • Estimate (5 seconds): 8x7x6x5x4x3x2x1 • Correct answer: 40,320 • (5/24 answered in the range 40,000-45,000) • (mean: 94837.50±342,393.30, range: 600 to 1,700,000)

7. Utility: Risk Averseness to Gains • If you were faced with the following choice, which alternative would you choose ? • 1. A sure gain of $240 (20/24) • 2. A 25% chance to gain $1000, and 75% chance to gain nothing (4/24)

8. Utility: Risk Seeking to Losses • If you were faced with the following choice, which alternative would you choose ? (N=24) • 1. A sure loss of $750 (7/24) • 2. A 75% chance to loss $1000, and 25% chance to loss nothing (17/24)

9. Utility: Probabilistic Insurance • Suppose you consider the possibility of insuring some property against damage, e.g. fire or theft. After examining the risks and the premium you find that you have no clear preference between the options of purchasing insurance or leaving the property uninsured. It is then called to your attention that the insurance company offers a new program called probabilistic insurance.In this program you pay half the regular premium. In case of damage, there is a 50% chance that you pay the other half of the premium and the insurance company covers all the losses; and there is 50% chance that you get back your insurance payment and suffer all the losses. For example if an accident occurs on an odd day of the month, you pay the other part of the regular premium and your losses are covered; but if the accident occurs on an even day of the month, your insurance payment is refunded and your losses are not covered. Recall that the premium for full coverage is such that you find this insurance barely worth its cost. Under These circumstances, would you purchase probabilistic insurance ? • 1. Yes (11/24) • 2. No (13/24)

10. Other Behavioral Traps • Time effects • The kiss and the electric shock experiment • The “saved for Christmas only” phenomenon • The lump-sum versus distribution-over-life lottery prize preference pattern

11. Avoiding Biases • Consideration of alternative perspectives seems the most effective • Reduce hindsight by considering reasons why a different outcome might have occurred • Minimize framing using a different frame • Avoid sunk-cost traps by changing decision makers (thus avoiding commitment to earlier decisions) • Reduce groupthink by having a “devil’s advocate” • Reduce actor-observer attribution (which attributes behavior to disposition as an observer and to situation as an actor) by swapping visual orientations (e.g. look at the situation from the point of view of the actor)

12. Normative Versus Descriptive Behavior: Are We Rational?? • Decision makers might have more than one objective • Optimal accuracy might not always maximize utility (e.g., attribution to disposition vs. situation might have a high value when it is right and lose only little) • Heuristics might be optimal over a large range of “normal” situations, as in likelihood-estimate biases • People do not expect to be part of a psychological experiment, and might be maximizing value for computational effort over a large number of cases over time • Overconfidence might be useful • Even behavioral traps might be useful (e.g. avoiding addiction by trapping oneself into the healthy behavior)