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Click to edit Master title style,Click to edit Master text styles,Second level,Third level,Fourth level,Fifth level,Chapter 13,Biases in decision making,George Hendrikse,Economics and Management of Organisations:,Co-ordination,Motivation and Strategy,Figure 13.2:Tendencies in decision making,Organisational,measures,changing the costs and/or benefits of the choice possibilities,changing the choice possibilities,structure the amount and nature of information,Short term focus,Current costs and benefits receive a disproportional amount of attention in decision processes.,1.Procrastination,Postpone,starting a healthy diet,starting a new project,killing a bad performing project,start studying for an exam,Organisational responses,pose a deadline for profitability,punish admitting mistakes mildly,allow credible excuses,separate starting and finishing decisions,job rotation(to limit overcommitment to project),Make results visible,clear figures,step-by-step plan,2.Obedience,Befehl ist befehl,Milgram experiments,A series of small,escalating concessions establishes an incredible obedience.,3.Melioration,Herrnstein&Prelec(1992),People(and animals)have the tendency to focus on todays costs and benefits of current choices,without taking future consequences of these choices into account.,Shortsightedness,Distance,Interest/background,Probability of certain events occurring,Law of small numbers,People often exaggerate the representativeness of a small sample.,Striking information gets too much weight in the decision process of people.,Prospect theory,Asymmetry between gains and losses,Reference point,Framing,The choices/preferences of people are often not robust w.r.t.the way in which choice possibilities/alternatives are represented.,Reference point,Most people are often more sensitive to how the current situation differs from to a reference point,than to the actual characteristics of the situation.,Two empirical observations,Loss aversion.People value a small loss twice as much as a similar gain.,Decreasing sensitivity.Marginal changes close to the reference point entail a larger change in utility than an identical marginal change far away from the reference point.,How do you depict these observations in a figure?,Value,Profit,Loss,Cumulative prospect theory,Three properties,Relationship between MU and risk-aversion is abandoned,Gain,-Loss,Loss aversion implies that there is a reference point(0),Implication for behaviour from,Loss aversion,Decreasing sensitivity,1.Loss aversion,2*Gain=Loss,Organisational change,“Injustices have to be committed at once,then they are experienced less;and benefits have to be given little by little,then they taste better.,-Machiavelli(1513),Costs at once because,U(-1)+U(-1)+U(-1)=3U(-1)U(-3),Benefits little by little because,U(3)U(1)+U(1)+U(1),Salary structure,Small annual raises are preferred above one-time jumps.,Response to uncertainty,People will respond differently to gains than to losses.,Figure 13.6:Gains and risk averse behaviour,Loss,Gain,Reference point,Value,Value certainty,Value uncertainty,100,50,Figure 13.7:Losses and risk seeking behaviour,Loss,Gain,Value,Value certainty,Value uncertainty,O,-50,-100,2.Decreasing sensitivity,Framing,A frame that gives the impression that losses are relatively small on the scale that is used,makes the the choice more attractive.,Application:Money illusion,People perceive a salary rise of 5%during a period of 12%inflation as less harmful than no raise during a period of 7%inflation.,Figure 13.8:Gains far away from the reference point are less attractive,Winst,Waarde,Nut,O,5,7,12,Governance implication of loss aversion,If preferences are determined by the(local)situation,then humans may be altruistic in organisation/families,and opportunistic in markets.,This may be due to,reference point,situation dependent allocation of limited cognitive units,Implication,Is the criticism of properly rights theory on TCE,i.e.opportunism in markets and altruism in organisations,valid?,Institutions mould,and are moulded by,human behaviour.,Institutions determine human behaviour,They influence the way information is presented,which information is communicated,and how information is given sense.,Human behaviour determines institutions,Humans form habits and routines.Institutions are durable and integrated sets of habits and routines.,Criticism on incomplete contracting theory,Only the causal effect of human behaviour on institutions is analysed.,
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