Judgment in Managerial Decision Making

242 Pages·2010·1.97 MB·English

by  Max H. Bazerman

JUDGMENT IN
MANAGERIAL
DECISION MAKING
SEVENTH EDITION
Max H. Bazerman
Harvard Business School
Don A. Moore
Carnegie Mellon University
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LibraryofCongressCataloging-in-PublicationData
Bazerman,MaxH.
Judgmentinmanagerialdecisionmaking/MaxH.Bazerman,DonMoore.—7thed.
p.cm
Includesbibliographicalreferencesandindex.
ISBN-13:978-0-470-04945-7(cloth:acidfreepaper)
ISBN-10:0-470-04945-6(cloth:acidfreepaper)
1.Decisionmaking. 2.Judgment. 3.Management, I.Moore,DonA.,1970– II.Title.
HD30.23.B382009
0
658.403—dc22 2008008490
PrintedintheUnitedStatesofAmerica
10 9 8 7 6 5 4 3 2 1
Dedicated to
MHB: To Howard Raiffa, for his influence on the field
of decision making and on me
DAM: To my dad, for his influence on me and
my decision making
This page intentionally left blank
P R E F A C E
Between 1981 and 1983, one of us (Max) served on the faculty of Boston Univer-
sity.Atthetime,hewasconductinglaboratorystudiesondecisionbiasesinnegotiation.
Behavioral decision research did not exist as a topic of study in most management
schools. The faculty at Boston University included a number of excellent colleagues,
and yet they knew very little about the emerging research on judgment. This lack of
awareness among management colleagues motivated Max to write this book. The goal
was to make the area of judgment a more central part of the management literature.
Anothergoalwastopresentthisinformationtomanagers,students,andresearchersin
an interesting manner that would improve their judgment capabilities. Max wrote the
first edition of this book with no expectation that he would be revising it to create the
seventheditionsomanyyearslater.
Behavioraldecisionresearchhasdevelopedconsiderablyoverthepasttwenty-five
years, and now provides many important insights into managerial behavior. This book
embeds behavioral decisionresearch intothe organizationalrealmbyexamining judg-
ment in a variety of managerial contexts. The audience for this book is anyone who is
interestedinimprovinghisorherjudgmentanddecisionmaking.Thefirstsixeditions
wereusedineconomics,psychology,decisionmaking,negotiations,andorganizational
behavior courses, and in a variety of executive programs as well. For the psychology
audience, the book offers a systematic framework for using psychological findings to
improvejudgment.Fortheeconomicsaudience,thebookoffersacritiqueoftheclassic
economicmodelofdecisionmaking.Andfortheconsumer,management,andfinancial
communities,thisbookcreatesopportunitiestomakebetterdecisions.
Excellent colleagues have been the primary source of ideas in this book. These
colleaguesincludeLindaBabcock,MahzarinBanaji,JonBaron,YoellaBereby-Meyer,
John Beshears, SallyBlount, IrisBohnet,Jeanne Brett, Art Brief,JoelBrockner, Day-
lian Cain, John Carroll, Eugene Caruso, Dolly Chugh, Ed Conlon, Tina Diekmann,
Nick Epley,HankFarber, Marla Felcher,AdamGalinsky, Steve Garcia, Dedre Gent-
ner,DanGilbert,JamesGillespie,FrancescaGino,LindaGinzel,BritGrosskopf,Tim
Hall,AndyHoffman,ChrisHsee,LorraineIdson,DonJacobs,HarryKatz,BoazKey-
sar, Tom Kochan, Terri Kurtzberg, Jenn Lerner, Roy Lewicki, George Loewenstein,
BetaMannix,LeighMcAlister,KathleenMcGinn,BobMcKersie,DougMedin,David
Messick,KatyMilkman,DonMoore,SimoneMoran,KeithMurnighan,MaggieNeale,
TerryOdean,HowardRaiffa,ToddRogers,LeeRoss,AlRoth,JeffRubin,BillSamuel-
son,DavidSchoorman,HollySchroth,PriShah,ZachSharek,DebSmall,HarrisSon-
dak, Sam Swift, Ann Tenbrunsel, Leigh Thompson, Cathy Tinsley, Mike Tushman,
Kimberly Wade-Benzoni, Michael Watkins, Toni Wegner, Dan Wegner, and Jason
Zweig.
v
vi (cid:2) Preface
The seventh edition saw Don join as a co-author, and extensive updating of the
materialthroughoutthebook.Newmaterialintheseventheditionincorporatesrecent
researchthatwehavedonewithDaylianCain,EugeneCaruso,NickEpley,Francesca
Gino,KatyMilkman,ToddRogers,andothers.UrielHaranofferedimportantsugges-
tionsontherevisionsfortheseventhedition.
Finally, the book has benefited from fantastic editorial help. Katie Shonk has re-
searched,edited,orrewrittenmostofMax’sworkoverthelastfifteenyears,including
multipleeditionsofthisbook.
In sum, this book has been enriched by our interactions with an unusually large
numberofpeople.Perhapsourmostimportantskillsareourabilitytopersuadeexcel-
lent people to work with us and our ability to appreciate their innovative ideas. We
hopetheresultisabookthatwillimprovethedecision-makingskillsofreaderslikeyou.
MaxH.Bazerman HarvardBusinessSchool
DonA.Moore CarnegieMellonUniversity
Contents
Chapter 1 Introduction to Managerial
Decision Making 1
The Anatomy of Decisions 1
System 1 and System 2 Thinking 3
The Bounds of Human Rationality 4
Introduction to Judgmental Heuristics 6
An Outline of Things to Come 10
Chapter 2 Common Biases 13
Biases Emanating from the Availability Heuristic 18
Biases Emanating from the Representativeness Heuristic 21
Biases Emanating from the Confirmation Heuristic 28
Integration and Commentary 40
Chapter 3 Bounded Awareness 42
Inattentional Blindness 46
Change Blindness 47
Focalism and the Focusing Illusion 48
Bounded Awareness in Groups 50
Bounded Awareness in Strategic Settings 51
Bounded Awareness in Auctions 59
Discussion 61
Chapter 4 Framing and the Reversal of Preferences 62
Framing and the Irrationality of the Sum of Our Choices 65
We Like Certainty, Even Pseudocertainty 67
The Framing and the Overselling of Insurance 70
What’s It Worth to You? 71
The Value We Place on What We Own 72
Mental Accounting 74
vii
viii (cid:2) Contents
Do No Harm, the Omission Bias, and the Status Quo 76
Rebate/Bonus Framing 78
Joint Versus Separate Preference Reversals 79
Conclusion and Integration 82
Chapter 5 Motivational and Emotional Influences
on Decision Making 84
When Emotion and Cognition Collide 84
Positive Illusions 90
Self-Serving Reasoning 94
Emotional Influences on Decision Making 96
Summary 99
Chapter 6 The Escalation of Commitment 101
The Unilateral Escalation Paradigm 103
The Competitive Escalation Paradigm 105
Why Does Escalation Occur? 108
Integration 112
Chapter 7 Fairness and Ethics in Decision Making 113
Perceptions of Fairness 113
Bounded Ethicality 122
Conclusion 134
Chapter 8 Common Investment Mistakes 136
The Psychology of Poor Investment Decisions 138
Active Trading 145
Action Steps 147
Chapter 9 Making Rational Decisions in Negotiations151
A Decision-Analytic Approach to Negotiations 152
Claiming Value in Negotiation 155
Creating Value in Negotiation 156
The Tools of Value Creation 161
Summary and Critique 166
Chapter 10 Negotiator Cognition 168
The Mythical Fixed Pie of Negotiation 168
The Framing of Negotiator Judgment 169
Escalation of Conflict 171