Wednesday, September 10, 2008

The hidden traps of decision making

I am reading an article from the Harvard Business Review titled "The hidden traps of decision making" for my Organizational Processes class. It provided much fodder for thought.

The first hidden trap of decision making is ANCHORING. When I read this, I couldn't help but recall my positive bias for all things made by Apple. My bias initially started from reading positive, glowing reviews about Steve Jobs and the iPod. In one case, in a friendly argument with my sister, I even passionately defended the iPod shuffle as a great MP3 player out of my desire to be consistent! Honestly though, I have to admit, it's a crappy idea. How useful is a MP3 player without a display, which will force you to listen to a random sequence of tracks? You might own it, but you can't control it, literally. But defend it, I did. I now understand I was a victim of the anchor trap. My strategy going forward, is to be aware that there exists such a trap and to stay as open minded as possible.

The second trap is STATUS QUO. I have been guilty of this so many times, that it's hard to pick just one example! I bought Cisco stock during the heydays for $65 a share. Then came the dot com bust and I watched the stock price fall steadily from $65 to the sub-$20 range, taking a big chunk of my portfolio with it. I finally sold it when it was in the teens. The reason this memory sticks with me painfully is not just the financial loss. For someone who thinks of herself as being a logical, analytical person and an engineer to boot, how can I reconcile the fact that it took me as long as it did to sell the stock? The reason I waited was because I knew I would have to do extra paperwork come tax season to report a capital loss, and I just didn't want to go to that trouble. I preferred to not disturb status quo no matter how illogical, than to take the extra 10 minutes to complete and file a schedule D IRS tax form. Now I know that kind of stupidity actually has a name.

The third trap is the SUNK COST trap. I couldn't help but smile when I read this because this time around, I was "smart" and recognized it. Just that it took too long to think of all possible alternatives and time was running out, so I resorted to the status quo trap instead! I still have the car I bought from my very first job 10 years ago. I couldn't bear to let it go for sentimental reasons. Besides, it's been a real work horse and never asked for much beyond basic maintenance in the time I've owned it. That changed 6 months ago. Last December I paid a mechanic $800 to take care of some problems. Eight months later, I was back at the mechanic's again, this time being told it's going to cost $2500 to fix the car. Fully realizing that I might be throwing good money after bad and working out conditional probabilities (I kid you not), I went ahead and had the car fixed anyway, promising myself that the next time the car needed repairs that cost more than $500, I will buy a new car. The human psyche is strange.

To be continued in the next post...


cking1 said...

Hah! Reading your description of the sunk cost decision making analysis of car maintenance made me think of my own dilemma, though I ended up solving it differently:

My VW diesel golf was in an accident and required about $3000 worth of repair. I seriously thought about simply finding a way to "release" the car, and continue to use my husband's Civic since we were planning to downsize to one car anyway. $3000, sheesh!

But then I checked to see how much my car was still worth (in working order) $11,000. Wow. Almost what I paid for it new! And a 98 honda civic? Well, it's a great grad student car - and if you know someone who needs one let me know. But it's not the one worth keeping.

So we decided to spend the two weeks that the VW was in the shop "resetting the mind frame". "Guess what?" I would say at random, "We are about to get a great new-used VW Diesel Golf!" "Really?" my good-sport husband would say, "Do you think it will be silver? And already have an MIT Sloan bumper sticker on it?" "Yes I do! and for only $3000!"
One strange but creative attempt to get over sunk costs...

Shuba Swaminathan said...

Loved the creative idea! Now, I only need to remember to not be anchored by it the next time my car's in the shop for repairs that cost more than $500 ;)

Deepa&Maruthy said...

Interestingly these "traps" seem to be fundamental to human behavior - things we inherited from our animal ancestors. These behaviors were key to their survival. If something works then dont change it. Even if something changes, do everything to return to the earlier status quo.

If this works for animals, then why not for humans ?

Shuba Swaminathan said...

I might venture to say it doesn't work for humans because our world is so much more complex. As humans, we have the intelligence to notice when someone else settles for status quo or is anchored, and take advantage of it. Think of the number of species we have driven to extinction because we knew exactly which water hole they come to drink at, and therefore were easy targets for us, or the fact that the design of a mousetrap hasn't evolved in what, a century? Notice that the animals we think are "intelligent" are ones that can adapt and modify their behavior such as dolphins, dogs etc. and the better they can modify their behavior to desired responses of humans, the more intelligent we think they are!