Bounded rationality in decision making: an analysis of the decision-making biases
Abstract
Decision-making is a multidisciplinary and ubiquitous phenomenon in organizations, and it can be observed at the individual, group, and organizational levels. Decision making plays, however, an increasingly important role for the manager, whose cognitive competence is reflected in his ability to identify potential opportunities, to immediately detect and solve the problems he faces, and to predict and prevent future threats. Nevertheless, to what extent do managers of the most diverse sectors and industries continue to rely on false knowledge when they have better strategies at their disposal? The present article proposes, through the application of bibliographically based instruments, the diagnosis of three prominent biases – overconfidence, optimism, and anchoring effect – in managers of the Portuguese port sector, as well as also seeking to establish a comparative analysis with the conclusions already documented in relation to the Brazilian civil construction sector. In addition, and in view of the results obtained, this paper also provides a set of measures capable of contributing to the mitigation of the effects of these and other biases, and, in this way, to the improvement of the decisions of said managers.
Keyword : biases, overconfidence, optimism, anchoring effect, port sector
How to Cite
Jordão, A. R., Costa, R., Dias, Álvaro L., Pereira, L., & Santos, J. P. (2020). Bounded rationality in decision making: an analysis of the decision-making biases. Business: Theory and Practice, 21(2), 654-665. https://doi.org/10.3846/btp.2020.11154
This work is licensed under a Creative Commons Attribution 4.0 International License.
References
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Bazerman, M., Curhan, J., Moore, D., & Valley, K. (2000). Negotiation. Annual Review of Psychology, 51(1), 279–314. https://doi.org/10.1146/annurev.psych.51.1.279
Bazerman, M., & Moore, D. (2013). Judgment in managerial decision making (8ª ed.). Wiley.
Bi, Y., Dang, Q., Li, S., Guo, J., & Zhang, B. (2016). The effect of overconfidence on persistent behaviour: The mediation effect of “I think I can do it” rather than “I’m attracted to it”. Psychological Reports, 118(1), 138–153. https://doi.org/10.1177/0033294115627524
Buehler, R., Griffin, D., & Ross, M. (1994). Exploring the “planning fallacy”: Why people underestimate their task completion times. Journal of Personality and Social Psychology, 67(3), 336–381. https://doi.org/10.1037/0022-3514.67.3.366
DeBondt, W., & Thaler, R. (1995). Financial decision-making in markets and firms: A behavioural perspective. In R. A. Jarrow, V. Maksimovic, & W. T. Ziemba (Eds.), Handbooks in OR & MS (pp. 385–410). Elsevier. https://doi.org/10.1016/S0927-0507(05)80057-X
Dedu, V., Turcan, C., & Turcan, R. (2012). An introduction to behavioural corporate finance. Annuals of the University of Oradea, Economic Science Series, 21(2), 471–476.
Epley, N. (2004). A tale of tuned decks? Anchoring as accessibility and anchoring as adjustment. In D. J. Koehler & N. Harvey (Eds.), Blackwell handbook judgment and decision making (pp. 240–256). Blackwell. https://doi.org/10.1002/9780470752937.ch12
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Feitosa, A. (2010). Excesso de confiança, otimismo e ancoragem em gestores da construção civil no brasil: Estudo de caso da Camargo Correa (Unpublished master’s thesis). ISCTE Business School, Lisbon.
Fischhoff, B., Slovic, P., & Lichtenstein, S. (1977). Knowing with certainty: The appropriateness of extreme confidence. Journal of Experimental Psychology: Human Perception and Performance, 3(4), 552–564. https://doi.org/10.1037/0096-1523.3.4.552
Frank, R. (2010). Microeconomics and behaviour (8th ed.). McGraw-Hill.
Galinsky, A. D., & Mussweiler, T. (2001). First offers as anchors: The role of perspective-taking and negotiator focus. Journal of Personality and Social Psychology, 81(4), 657–669. https://doi.org/10.1037/0022-3514.81.4.657
Gigerenzer, G., Hoffrage, U., & Kleinbölting, H. (1991). Probabilistic mental models: A Brunswikian theory of confidence. Pyschological Review, 98(4), 506–528. https://doi.org/10.1037/0033-295X.98.4.506
Griffin, D., & Varey, C. (1996). Towards a consensus on over-confidence. Organizational Behaviour and Human Decision Processes, 65(3), 227–231. https://doi.org/10.1006/obhd.1996.0023
Gunia, B., Swaab, R., Sivanathan, N., & Galinsky, A. (2013). The remarkable robustness of the first-offer effect: Across culture, power, and issues. Personality and Social Psychology Bulletin, 39(12), 1547–1558. https://doi.org/10.1177/0146167213499236
Hackbarth, D. (2004). Managerial traits and capital structure decisions. Journal of Financial and Quantitative Analysis, 43(4), 843–882. https://doi.org/10.1017/S002210900001437X
Hammond, J., Keeney, R., & Raiffa, H. (1999). Smart choices: A practical guide to making better life decisions. Broadway.
Haran, U., Moore, D. A., & Morewedge, C. (2010). A simple remedy for overprecision in judgment. Judgment and Decision Making, 5(7), 467–476. https://doi.org/10.1037/e615882011-200
Heaton, J. B. (2002). Managerial optimism and corporate finance. Financial Management, 31(2), 33–45. https://doi.org/10.2307/3666221
INE (2016). Estatísticas dos Transportes e Comunicações (Edição 2017). Instituto Nacional da Estatística. http://www.concorrencia.pt/vPT/Noticias_Eventos/ConsultasPublicas/Documents/Estudo_Setor%20Portu%C3%A1rio_ENQUADRAMENTO%20DA%20CONSULTA%20P%C3%9ABLICA.pdf
Jacowitz, K. E., & Kahneman, D. (1995). Measures of anchoring in estimation tasks. Personality and Social Psychology Bulletin, 21(11), 1161–1166. https://doi.org/10.1177/01461672952111004
Kagel, J. H., & Levin, D. (1986). The winner’s curse and public information in common value auctions. The American Economic Review, 894–920.
Kahneman, D., & Lovallo, D. (1993). Timid choices and bold forecasts: A cognitive perspective on risk taking. Management science, 39(1), 17–31. https://doi.org/10.1287/mnsc.39.1.17
Klayman, J., Soll, J. B., González-Vallejo, C., & Barlas, S. (1999). Overconfidence: It depends on how, what, and whom you ask. Organizational Behavioral and Human Decision Process, 79(3), 216–247. https://doi.org/10.1006/obhd.1999.2847
Koriat, A., Lichtenstein, S., & Fischhoff, B. (1980). Reasons for confidence. Journal of Experimental Psychology: Human Learning and Memory, 6(2), 107–118. https://doi.org/10.1037/0278-7393.6.2.107
Libby, R., Rennekamp, K. (2012). Self-serving attribution bias, overconfidence, and the issuance of management forecasts. Journal of Accounting Research, 50(1), 197–237. https://doi.org/10.1111/j.1475-679X.2011.00430.x
Luppe, M. R., & Fávero, L. (2012). Anchoring heuristic and the estimation of accounting and financial indicators. International Journal of Finance and Accounting, 1(5), 120–130.
Malmendier, U., & Tate, G. (2015). Behavioural CEOs: The role of managerial overconfidence. Journal of Economic Perspectives, 29(4), 37–60. https://doi.org/10.1257/jep.29.4.37
Malmendier, U., Tate, G., & Yan, J. (2011). Overconfidence and early-life experiences: The effect of managerial traits on corporate financial policies. Journal of Finance, 66(5), 1687–1733. https://doi.org/10.1111/j.1540-6261.2011.01685.x
Meyer, W. G. (2014). The effect of optimism bias on the decision to terminate failing projects. Project Management Journal, 45(4), 7–20. https://doi.org/10.1002/pmj.21435
Meyvis, T., Ratner, R. K., & Levav, J. (2010). Why don’t we learn to accurately forecast feelings? How misremembering our predictions blinds us to past forecasting errors. Journal of Experimental Psychology: General, 139(4), 579. https://doi.org/10.1037/a0020285
Mussweiler, T., Strack, F., & Pfeiffer, T. (2000). Overcoming the inevitable anchoring effect: Considering the opposite compensates for selective accessibility. Personality and Social Psychology Bulletin, 26(9), 1142–1150. https://doi.org/10.1177/01461672002611010
Neale, M. A., & Northcraft, G. B. (1989). Behavioral negotiation theory: a framework for conceptualizing dyadic bargaining. Northwestern University.
Nofsinger, J. R. (2005). The psychology of investing (2nd ed.). Prentice Hall.
Schade, C., & Koellinger, P. (2007). Heuristics, biases, and the behaviour of entrepreneurs. In M. Minniti (Ed.), Entrepreneurship: The Engine of Growth, 1, 41–63. Praeger.
Scheier, M. F., & Carver, C. S. (1988). A model of behavioural self-regulation: Translating intention into action. In L. Berkowitz (Eds.), Advances in experimental social psychology, 21, 303–346. Academic Press. https://doi.org/10.1016/S0065-2601(08)60230-0
Scheier, M. F., Carver, C. S., & Bridges, M. W. (1994). Distinguishing optimism from neuroticism (and trait anxiety, self-mastery, and self-esteem) – a re-evaluation of the Life Orientation Test. Journal of Personality and Social Psychology, 67(6), 1063–1078. https://doi.org/10.1037/0022-3514.67.6.1063
Serfas, S. (2011). The impact of cognitive biases on capital investments – Empirical evidence regarding the anchoring heuristic. Zeitschrift fur Planung und Unternehmenssteuerung, 21(4), 427–446. https://doi.org/10.1007/s00187-011-0120-0
Siemiatycki, M. (2010). Managing optimism biases in the delivery of large infrastructure projects: A corporate performance benchmarking approach. European Journal of Transport and Infrastructure Research, 10(1), 30–41.
Simon, H. A. (1983). Reason in human affairs. Standford University Press.
Simon, H. A. (1997). Administrative behaviour (4th ed.). The Free Press.
Thaler, R. H. (2005). Advances in behavioural finance. Princeton University Press.
Thaler, R. H. (2016). Comportamento inadequado: A construção da economia comportamental. Actual.
Thaler, R. H., & Benartzi, S. (2004). Save more tomorrow™: Using behavioral economics to increase employee saving. Journal of political Economy, 112(S1), S164–S187. https://doi.org/10.1086/380085
Tversky, A., & Kahneman, D. (1974). Judgment under uncertainty: Heuristics and biases. Science, 185(4157), 1124–1131. https://doi.org/10.1126/science.185.4157.1124
Tversky, A., & Kahneman, D. (1986). Judgment under uncertainty: Heuristics and biases. Judgment and Decision Making: An Interdisciplinary Reader, 38–55.
Weinstein, N. D. (1980). Unrealistic optimism about future events. Journal of Personality and Social Psychology, 39(5), 806–820. https://doi.org/10.1037/0022-3514.39.5.806
ADC (2015). Estudo sobre a concorrência no setor portuário (Consulta pública, Julho). Autoridade da Concorrência. http://www.concorrencia.pt/vPT/Noticias_Eventos/ConsultasPublicas/Documents/Estudo_Setor%20Portu%C3%A1rio_ENQUADRAMENTO%20DA%20CONSULTA%20P%C3%9ABLICA.pdf
Baker, M., & Wurgler, J. (2004). A catering theory of dividends. The Journal of Finance, 59(3), 1125–1166. https://doi.org/10.1111/j.1540-6261.2004.00658.x
Bandeira, M., Bekou, V., Lott, K., Teixeira, M., & Rocha, S. (2002). Validação transcultural do Teste de Orientação da Vida (TOV-R). Estudos da Psicologia, 7(2), 251–258. https://doi.org/10.1590/S1413-294X2002000200006
Bazerman, M., Curhan, J., Moore, D., & Valley, K. (2000). Negotiation. Annual Review of Psychology, 51(1), 279–314. https://doi.org/10.1146/annurev.psych.51.1.279
Bazerman, M., & Moore, D. (2013). Judgment in managerial decision making (8ª ed.). Wiley.
Bi, Y., Dang, Q., Li, S., Guo, J., & Zhang, B. (2016). The effect of overconfidence on persistent behaviour: The mediation effect of “I think I can do it” rather than “I’m attracted to it”. Psychological Reports, 118(1), 138–153. https://doi.org/10.1177/0033294115627524
Buehler, R., Griffin, D., & Ross, M. (1994). Exploring the “planning fallacy”: Why people underestimate their task completion times. Journal of Personality and Social Psychology, 67(3), 336–381. https://doi.org/10.1037/0022-3514.67.3.366
DeBondt, W., & Thaler, R. (1995). Financial decision-making in markets and firms: A behavioural perspective. In R. A. Jarrow, V. Maksimovic, & W. T. Ziemba (Eds.), Handbooks in OR & MS (pp. 385–410). Elsevier. https://doi.org/10.1016/S0927-0507(05)80057-X
Dedu, V., Turcan, C., & Turcan, R. (2012). An introduction to behavioural corporate finance. Annuals of the University of Oradea, Economic Science Series, 21(2), 471–476.
Epley, N. (2004). A tale of tuned decks? Anchoring as accessibility and anchoring as adjustment. In D. J. Koehler & N. Harvey (Eds.), Blackwell handbook judgment and decision making (pp. 240–256). Blackwell. https://doi.org/10.1002/9780470752937.ch12
Fairchild, R. (2005). The effect of managerial overconfidence: Asymmetric information, and moral hazard on capital structure decisions. Institute of Chartered Financial Analysts of India (ICFAI) Journal of Behavioural Finance, 2(4), 46–68. https://doi.org/10.2139/ssrn.711845
Feitosa, A. (2010). Excesso de confiança, otimismo e ancoragem em gestores da construção civil no brasil: Estudo de caso da Camargo Correa (Unpublished master’s thesis). ISCTE Business School, Lisbon.
Fischhoff, B., Slovic, P., & Lichtenstein, S. (1977). Knowing with certainty: The appropriateness of extreme confidence. Journal of Experimental Psychology: Human Perception and Performance, 3(4), 552–564. https://doi.org/10.1037/0096-1523.3.4.552
Frank, R. (2010). Microeconomics and behaviour (8th ed.). McGraw-Hill.
Galinsky, A. D., & Mussweiler, T. (2001). First offers as anchors: The role of perspective-taking and negotiator focus. Journal of Personality and Social Psychology, 81(4), 657–669. https://doi.org/10.1037/0022-3514.81.4.657
Gigerenzer, G., Hoffrage, U., & Kleinbölting, H. (1991). Probabilistic mental models: A Brunswikian theory of confidence. Pyschological Review, 98(4), 506–528. https://doi.org/10.1037/0033-295X.98.4.506
Griffin, D., & Varey, C. (1996). Towards a consensus on over-confidence. Organizational Behaviour and Human Decision Processes, 65(3), 227–231. https://doi.org/10.1006/obhd.1996.0023
Gunia, B., Swaab, R., Sivanathan, N., & Galinsky, A. (2013). The remarkable robustness of the first-offer effect: Across culture, power, and issues. Personality and Social Psychology Bulletin, 39(12), 1547–1558. https://doi.org/10.1177/0146167213499236
Hackbarth, D. (2004). Managerial traits and capital structure decisions. Journal of Financial and Quantitative Analysis, 43(4), 843–882. https://doi.org/10.1017/S002210900001437X
Hammond, J., Keeney, R., & Raiffa, H. (1999). Smart choices: A practical guide to making better life decisions. Broadway.
Haran, U., Moore, D. A., & Morewedge, C. (2010). A simple remedy for overprecision in judgment. Judgment and Decision Making, 5(7), 467–476. https://doi.org/10.1037/e615882011-200
Heaton, J. B. (2002). Managerial optimism and corporate finance. Financial Management, 31(2), 33–45. https://doi.org/10.2307/3666221
INE (2016). Estatísticas dos Transportes e Comunicações (Edição 2017). Instituto Nacional da Estatística. http://www.concorrencia.pt/vPT/Noticias_Eventos/ConsultasPublicas/Documents/Estudo_Setor%20Portu%C3%A1rio_ENQUADRAMENTO%20DA%20CONSULTA%20P%C3%9ABLICA.pdf
Jacowitz, K. E., & Kahneman, D. (1995). Measures of anchoring in estimation tasks. Personality and Social Psychology Bulletin, 21(11), 1161–1166. https://doi.org/10.1177/01461672952111004
Kagel, J. H., & Levin, D. (1986). The winner’s curse and public information in common value auctions. The American Economic Review, 894–920.
Kahneman, D., & Lovallo, D. (1993). Timid choices and bold forecasts: A cognitive perspective on risk taking. Management science, 39(1), 17–31. https://doi.org/10.1287/mnsc.39.1.17
Klayman, J., Soll, J. B., González-Vallejo, C., & Barlas, S. (1999). Overconfidence: It depends on how, what, and whom you ask. Organizational Behavioral and Human Decision Process, 79(3), 216–247. https://doi.org/10.1006/obhd.1999.2847
Koriat, A., Lichtenstein, S., & Fischhoff, B. (1980). Reasons for confidence. Journal of Experimental Psychology: Human Learning and Memory, 6(2), 107–118. https://doi.org/10.1037/0278-7393.6.2.107
Libby, R., Rennekamp, K. (2012). Self-serving attribution bias, overconfidence, and the issuance of management forecasts. Journal of Accounting Research, 50(1), 197–237. https://doi.org/10.1111/j.1475-679X.2011.00430.x
Luppe, M. R., & Fávero, L. (2012). Anchoring heuristic and the estimation of accounting and financial indicators. International Journal of Finance and Accounting, 1(5), 120–130.
Malmendier, U., & Tate, G. (2015). Behavioural CEOs: The role of managerial overconfidence. Journal of Economic Perspectives, 29(4), 37–60. https://doi.org/10.1257/jep.29.4.37
Malmendier, U., Tate, G., & Yan, J. (2011). Overconfidence and early-life experiences: The effect of managerial traits on corporate financial policies. Journal of Finance, 66(5), 1687–1733. https://doi.org/10.1111/j.1540-6261.2011.01685.x
Meyer, W. G. (2014). The effect of optimism bias on the decision to terminate failing projects. Project Management Journal, 45(4), 7–20. https://doi.org/10.1002/pmj.21435
Meyvis, T., Ratner, R. K., & Levav, J. (2010). Why don’t we learn to accurately forecast feelings? How misremembering our predictions blinds us to past forecasting errors. Journal of Experimental Psychology: General, 139(4), 579. https://doi.org/10.1037/a0020285
Mussweiler, T., Strack, F., & Pfeiffer, T. (2000). Overcoming the inevitable anchoring effect: Considering the opposite compensates for selective accessibility. Personality and Social Psychology Bulletin, 26(9), 1142–1150. https://doi.org/10.1177/01461672002611010
Neale, M. A., & Northcraft, G. B. (1989). Behavioral negotiation theory: a framework for conceptualizing dyadic bargaining. Northwestern University.
Nofsinger, J. R. (2005). The psychology of investing (2nd ed.). Prentice Hall.
Schade, C., & Koellinger, P. (2007). Heuristics, biases, and the behaviour of entrepreneurs. In M. Minniti (Ed.), Entrepreneurship: The Engine of Growth, 1, 41–63. Praeger.
Scheier, M. F., & Carver, C. S. (1988). A model of behavioural self-regulation: Translating intention into action. In L. Berkowitz (Eds.), Advances in experimental social psychology, 21, 303–346. Academic Press. https://doi.org/10.1016/S0065-2601(08)60230-0
Scheier, M. F., Carver, C. S., & Bridges, M. W. (1994). Distinguishing optimism from neuroticism (and trait anxiety, self-mastery, and self-esteem) – a re-evaluation of the Life Orientation Test. Journal of Personality and Social Psychology, 67(6), 1063–1078. https://doi.org/10.1037/0022-3514.67.6.1063
Serfas, S. (2011). The impact of cognitive biases on capital investments – Empirical evidence regarding the anchoring heuristic. Zeitschrift fur Planung und Unternehmenssteuerung, 21(4), 427–446. https://doi.org/10.1007/s00187-011-0120-0
Siemiatycki, M. (2010). Managing optimism biases in the delivery of large infrastructure projects: A corporate performance benchmarking approach. European Journal of Transport and Infrastructure Research, 10(1), 30–41.
Simon, H. A. (1983). Reason in human affairs. Standford University Press.
Simon, H. A. (1997). Administrative behaviour (4th ed.). The Free Press.
Thaler, R. H. (2005). Advances in behavioural finance. Princeton University Press.
Thaler, R. H. (2016). Comportamento inadequado: A construção da economia comportamental. Actual.
Thaler, R. H., & Benartzi, S. (2004). Save more tomorrow™: Using behavioral economics to increase employee saving. Journal of political Economy, 112(S1), S164–S187. https://doi.org/10.1086/380085
Tversky, A., & Kahneman, D. (1974). Judgment under uncertainty: Heuristics and biases. Science, 185(4157), 1124–1131. https://doi.org/10.1126/science.185.4157.1124
Tversky, A., & Kahneman, D. (1986). Judgment under uncertainty: Heuristics and biases. Judgment and Decision Making: An Interdisciplinary Reader, 38–55.
Weinstein, N. D. (1980). Unrealistic optimism about future events. Journal of Personality and Social Psychology, 39(5), 806–820. https://doi.org/10.1037/0022-3514.39.5.806