DOCSLIB.ORG

Judgment in Managerial Decision Making, 7Th Edition

Total Page：16

File Type：pdf, Size：1020Kb

Download full-text PDF Read full-text
Judgment in Managerial Decision Making, 7Th Edition JUDGMENT IN MANAGERIAL DECISION MAKING SEVENTH EDITION Max H. Bazerman Harvard Business School Don A. Moore Carnegie Mellon University JOHN WILEY &SONS,INC. Executive Publisher Don Fowley Production Assistant Matt Winslow Production Manager Dorothy Sinclair Executive Marketing Manager Amy Scholz Marketing Coordinator Carly Decandia Creative Director Jeof Vita Designer Jim O’Shea Production Management Services Elm Street Publishing Services Electronic Composition Thomson Digital Editorial Program Assistant Carissa Marker Senior Media Editor Allison Morris Cover Photo Corbis Digital Stock (top left), Photo Disc/Getty Images (top right), and Photo Disc, Inc. (bottom) This book was set in 10/12 New Caledonia by Thomson Digital and printed and bound by Courier/Westford. The cover was printed by Courier/Westford. This book is printed on acid free paper. Copyright # 2009 John Wiley & Sons, Inc. All rights reserved. No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning or otherwise, except as permitted under Sections 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher, or authorization through payment of the appropriate per-copy fee to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, website www.copyright.com. Requests to the Publisher for permission should be addressed to the Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030-5774, (201)748-6011, fax (201)748-6008, website http://www.wiley.com/go/permissions. To order books or for customer service please, call 1-800-CALL WILEY (225-5945). Library of Congress Cataloging-in-Publication Data Bazerman, Max H. Judgment in managerial decision making/Max H. Bazerman, Don Moore.—7th ed. p. cm Includes bibliographical references and index. ISBN-13: 978-0-470-04945-7 (cloth: acid free paper) ISBN-10: 0-470-04945-6 (cloth: acid free paper) 1. Decision making. 2. Judgment. 3. Management, I. Moore, Don A., 1970– II. Title. HD30.23.B38 2009 658.4 003—dc22 2008008490 Printed in the United States of America 10987654321 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 PREFACE Between 1981 and 1983, one of us (Max) served on the faculty of Boston Univer- sity. At the time, he was conducting laboratory studies on decision biases in negotiation. 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. Another goal was to present this information to managers, students, and researchers in 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 seventh edition so many years later. Behavioral decision research has developed considerably over the past twenty-five years, and now provides many important insights into managerial behavior. This book embeds behavioral decision research into the organizational realm by examining judg- ment in a variety of managerial contexts. The audience for this book is anyone who is interested in improving his or her judgment and decision making. The first six editions were used in economics, psychology, decision making, negotiations, and organizational 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 improve judgment. For the economics audience, the book offers a critique of the classic economic model of decision making. And for the consumer, management, and financial communities, this book creates opportunities to make better decisions. Excellent colleagues have been the primary source of ideas in this book. These colleagues include Linda Babcock, Mahzarin Banaji, Jon Baron, Yoella Bereby-Meyer, John Beshears, Sally Blount, Iris Bohnet, Jeanne Brett, Art Brief, Joel Brockner, Day- lian Cain, John Carroll, Eugene Caruso, Dolly Chugh, Ed Conlon, Tina Diekmann, Nick Epley, Hank Farber, Marla Felcher, Adam Galinsky, Steve Garcia, Dedre Gent- ner, Dan Gilbert, James Gillespie, Francesca Gino, Linda Ginzel, Brit Grosskopf, Tim Hall, Andy Hoffman, Chris Hsee, Lorraine Idson, Don Jacobs, Harry Katz, Boaz Key- sar, Tom Kochan, Terri Kurtzberg, Jenn Lerner, Roy Lewicki, George Loewenstein, Beta Mannix, Leigh McAlister, Kathleen McGinn, Bob McKersie, Doug Medin, David Messick, Katy Milkman, Don Moore, Simone Moran, Keith Murnighan, Maggie Neale, Terry Odean, Howard Raiffa, Todd Rogers, Lee Ross, Al Roth, Jeff Rubin, Bill Samuel- son, David Schoorman, Holly Schroth, Pri Shah, Zach Sharek, Deb Small, Harris Son- 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 Preface The seventh edition saw Don join as a co-author, and extensive updating of the material throughout the book. New material in the seventh edition incorporates recent research that we have done with Daylian Cain, Eugene Caruso, Nick Epley, Francesca Gino, Katy Milkman, Todd Rogers, and others. Uriel Haran offered important sugges- tions on the revisions for the seventh edition. Finally, the book has benefited from fantastic editorial help. Katie Shonk has re- searched, edited, or rewritten most of Max’s work over the last fifteen years, including multiple editions of this book. In sum, this book has been enriched by our interactions with an unusually large number of people. Perhaps our most important skills are our ability to persuade excel- lent people to work with us and our ability to appreciate their innovative ideas. We hope the result is a book that will improve the decision-making skills of readers like you. Max H. Bazerman Harvard Business School Don A. Moore Carnegie Mellon University 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 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 Negotiations 151 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 Contents ix Overestimating Your Value in Negotiation 172 Self-Serving Biases in Negotiation 174 Anchoring in Negotiations 176 Conclusions 178 Chapter 11 Improving Decision Making 179 Strategy 1: Use Decision-Analysis Tools 181 Strategy 2: Acquire Expertise 186 Strategy 3: Debias Your Judgment 189 Strategy 4: Reason Analogically 191 Strategy 5: Take an Outsider’s View 193 Strategy 6: Understand Biases in Others 195 Conclusion 198 References 200 Index 223 This page intentionally left blank CHAPTER ONE Introduction to Managerial Decision Making The human mind packs spectacular power into its modest three-pound mass. With little effort, we can accomplish sophisticated tasks, such as recognizing faces or catch- ing a ball, that are far beyond the abilities of even the most powerful computers and sophisticated robots. Yet most people remain largely unaware of how their minds accomplish complex tasks, and self-insight and experience offer little guidance. The fact that we lack an ‘‘operating manual’’ for our minds might not seem important. In fact, however, our lack of understanding of how our minds work has profound consequences. Without an understanding of our thoughts and behaviors, we cannot anticipate when the cognitive processes that usually serve us so well are likely to lead us astray. Fortunately, psychological research has uncovered many of the clever and sophisti- cated shortcuts on which our brains rely to help us get through the day—as well as common errors that even bright people make on a regular basis. These errors can lead to minor problems, such as choosing the wrong product or the wrong investment. They also can contribute to big problems, such as bankruptcy, government inefficiency, and social injustice.
Load more

Recommended publications
  • (Over)Confidence Predicts Escalation of Public Commitment
    Journal of Experimental Social Psychology 69 (2017) 13–22 Contents lists available at ScienceDirect Journal of Experimental Social Psychology journal homepage: www.elsevier.com/locate/jesp Pride before the fall: (Over)confidence predicts escalation of public commitment Richard Ronay ⁎, Janneke K. Oostrom, Nale Lehmann-Willenbrock, Mark Van Vugt Vrije Universiteit Amsterdam, The Netherlands HIGHLIGHTS • We examined the effect of overconfidence on escalation of commitment. • In a private context, overconfidence is unrelated to escalation decisions. • In a public context, overconfidence is positively related to escalation decisions. • Individual differences in overconfidence are related to reputation sensitivity. • Reputational concerns drive publicly announced investment decision. article info abstract Article history: In four studies we examined the effect of overconfidence on escalation of commitment in investment tasks. Study Received 16 February 2016 1(N = 105) revealed a positive relationship between overconfidence and decisions to escalate. In contrast, Study Revised 15 October 2016 2(N = 121) showed that overconfidence was negatively related to escalation of commitment. The reversal of this Accepted 16 October 2016 effect appeared to emerge as a function of the public (Study 1) versus private (Study 2) context in which the in- Available online 20 October 2016 vestment decisions were made. In Study 3 (N = 108) and Study 4 (N = 380) we experimentally replicated this pattern of findings and found support for the explanatory role of reputational concerns. A meta-analysis of the Keywords: fi fi Overconfidence ndings from our four studies showed that overcon dence is positively related to escalation of commitment in Confidence public contexts, and that this relationship is absent when decisions are made privately.
    [Show full text]
  • Lecture Notes
    GRADUATE GAME THEORY LECTURE NOTES BY OMER TAMUZ California Institute of Technology 2018 Acknowledgments These lecture notes are partially adapted from Osborne and Rubinstein [29], Maschler, Solan and Zamir [23], lecture notes by Federico Echenique, and slides by Daron Acemoglu and Asu Ozdaglar. I am indebted to Seo Young (Silvia) Kim and Zhuofang Li for their help in finding and correcting many errors. Any comments or suggestions are welcome. 2 Contents 1 Extensive form games with perfect information 7 1.1 Tic-Tac-Toe ........................................ 7 1.2 The Sweet Fifteen Game ................................ 7 1.3 Chess ............................................ 7 1.4 Definition of extensive form games with perfect information ........... 10 1.5 The ultimatum game .................................. 10 1.6 Equilibria ......................................... 11 1.7 The centipede game ................................... 11 1.8 Subgames and subgame perfect equilibria ...................... 13 1.9 The dollar auction .................................... 14 1.10 Backward induction, Kuhn’s Theorem and a proof of Zermelo’s Theorem ... 15 2 Strategic form games 17 2.1 Definition ......................................... 17 2.2 Nash equilibria ...................................... 17 2.3 Classical examples .................................... 17 2.4 Dominated strategies .................................. 22 2.5 Repeated elimination of dominated strategies ................... 22 2.6 Dominant strategies ..................................
    [Show full text]
  • Paper and Pencils for Everyone
    (CM^2) Math Circle Lesson: Game Theory of Gomuku and (m,n,k-games) Overview: Learning Objectives/Goals: to expose students to (m,n,k-games) and learn the general history of the games through out Asian cultures. SWBAT… play variations of m,n,k-games of varying degrees of difficulty and complexity as well as identify various strategies of play for each of the variations as identified by pattern recognition through experience. Materials: Paper and pencils for everyone Vocabulary: Game – we will create a working definition for this…. Objective – the goal or point of the game, how to win Win – to do (achieve) what a certain game requires, beat an opponent Diplomacy – working with other players in a game Luck/Chance – using dice or cards or something else “random” Strategy – techniques for winning a game Agenda: Check in (10-15min.) Warm-up (10-15min.) Lesson and game (30-45min) Wrap-up and chill time (10min) Lesson: Warm up questions: Ask these questions after warm up to the youth in small groups. They may discuss the answers in the groups and report back to you as the instructor. Write down the answers to these questions and compile a working definition. Try to lead the youth so that they do not name a specific game but keep in mind various games that they know and use specific attributes of them to make generalizations. · What is a game? · Are there different types of games? · What make something a game and something else not a game? · What is a board game? · How is it different from other types of games? · Do you always know what your opponent (other player) is doing during the game, can they be sneaky? · Do all of games have the same qualities as the games definition that we just made? Why or why not? Game history: The earliest known board games are thought of to be either ‘Go’ from China (which we are about to learn a variation of), or Senet and Mehen from Egypt (a country in Africa) or Mancala.
    [Show full text]
  • Understanding Emotions in Electronic Auctions: Insights from Neurophysiology
    Understanding Emotions in Electronic Auctions: Insights from Neurophysiology Marc T. P. Adam and Jan Krämer Abstract The design of electronic auction platforms is an important field of electronic commerce research. It requires not only a profound understanding of the role of human cognition in human bidding behavior but also of the role of human affect. In this chapter, we focus specifically on the emotional aspects of human bidding behavior and the results of empirical studies that have employed neurophysiological measurements in this regard. By synthesizing the results of these studies, we are able to provide a coherent picture of the role of affective processes in human bidding behavior along four distinct theoretical pathways. 1 Introduction Electronic auctions (i.e., electronic auction marketplaces) are information systems that facilitate and structure the exchange of products and services between several potential buyers and sellers. In practice, electronic auctions have been employed for a wide range of goods and services, such as commodities (e.g., Internet consumer auction markets, such as eBay.com), perishable goods (e.g., Dutch flower markets, such as by Royal FloraHolland), consumer services (e.g., procurement auction markets, such as myhammer.com), or property rights (e.g., financial double auction markets such as NASDAQ). In this vein, a large share of our private and commercial economic activity is being organized through electronic auctions today (Adam et al. 2017;Kuetal.2005). Previous research in information systems, economics, and psychology has shown that the design of electronic auctions has a tremendous impact on the auction M. T. P. Adam College of Engineering, Science and Environment, The University of Newcastle, Callaghan, Australia e-mail: [email protected] J.
    [Show full text]
  • Escalation Revisited: Investigating the Influence of Personality and Organizational Support on Escalation of Commitment
    Escalation Revisited: Investigating the Influence of Personality and Organizational Support on Escalation of Commitment by Julia Walsh Howell A dissertation submitted to the Graduate Faculty of Auburn University in partial fulfillment of the requirements for the Degree of Doctor of Philosophy Auburn, Alabama August 2, 2014 Keywords: Escalation of commitment, personality, organizational support, sunk costs Copyright 2014 by Julia Walsh Howell Approved by Daniel Svyantek, Chair, Professor and Chair, Department of Psychology Ana Franco-Watkins, Associate Professor, Department of Psychology Alejandro Lazarte, Associate Professor, Department of Psychology Alan Walker, Associate Professor, Department of Management Abstract Escalation of commitment research has been narrow in its scope of influencing factors. A goal of this study was to remedy this gap by including factors at the individual, organizational, and decision context level that affect escalation. Furthermore, to my knowledge there is no other escalation research that has included both an economic and a human resources (HR) decision scenario. A significant contribution of this study was the results showing these two types of scenarios have different, and sometimes opposing, outcomes. In the economic context, sunk costs were positively related to escalation, but the relationship was inversed in the HR context. Additionally, facets of neuroticism and openness to experience were related to escalation in the economic context, but no such relationships were present in the HR context. Openness to experience moderated the relationship between organizational support and escalation. The results in the HR context have practical implications regarding how managers select, train, promote, and terminate employees. Furthermore, the differential outcomes in the economic and HR contexts provide a first step in expanding the theoretical implications of varying contexts and their influence on escalation.
    [Show full text]
  • Descriptive Asymmetries in Evaluative Vs Non-Evaluative Framing of the Dollar Auction Implications for Theories of Escalation of Commitment
    Descriptive Asymmetries In Evaluative vs Non-Evaluative Framing of The Dollar Auction Implications for Theories of Escalation of Commitment By Samuel Wallis Rogers Middle School Dr. Charles Wallis Department of Philosophy, CSULB 1.) Introduction The dollar auction, first described by Shubik1, is a classic example of an escalation of commitment or entrapment scenario described by von Neuman2 and Campbell3. Specifically, the dollar auction is a logical game played with multiple players. The game leader auctions a dollar, and the two or more players bid on it. The winner pays their bet and gets the dollar; the second highest bidder pays their bet and gets nothing. In practice, once people begin bidding, they will escalate their commitment (increase their bids). Often, the bids build up long past the point when either player could gain anything from winning. The game model is similar to the War of Attrition game and the All-pay Auction. In escalation of commitment scenarios, decision makers initially commit resources—money, time, reputation, etc.—in order to achieve some goal or goals. After the initial resource commitment, decision makers must repeatedly choose whether to allocate further resources under uncertainty and after receiving negative feedback about prior resource allocations. Escalation of commitment eludes explanation by traditional economics since traditional microeconomics supposes that decision makers maximize expected utility, i.e., microeconomics predicts that rational decision makers will choose the option with the highest utility, where utility equals the probability of an expected outcome multiplied by the value assigned to the outcome by the decision maker. According to accounting and economics texts normative criteria for investments dictate that one should invest resources only when marginal (future) benefits exceed marginal costs.
    [Show full text]
  • Can Group Decision-Making Mitigate Propensity of Escalating Commitment?
    Front. Bus. Res. China 2008, 2(1): 33–49 DOI 10.1007/s11782-008-0003-x RESEARCH ARTICLE LIU Zhiyuan, LIU Qing Can group decision-making mitigate propensity of escalating commitment？ ―An experimental research based on the prospect theory © Higher Education Press and Springer-Verlag 2008 Abstract Escalation of commitment is a well-known investment trap, which is irrational from an economic point of view but inevitable due to psychological factors. Based on a role-playing experiment, this paper intends to analyze the impact of different effects of the prospect theory on the tendency of escalating commitment in different decision-making processes, and discusses whether certain decision-making processes can mitigate the tendency of escalating commitment. Our empirical results indicate that groups with prior individual consideration can make better decisions involving effects of the prospect theory than individuals and groups. Keywords escalation of commitment, group decision-making, prospect theory 摘要 恶性增资现象广泛存在于各种组织结构中，对社会的资源配置产生重大影响。 从经济学角度看，恶性增资是非理性，不应该发生, 但从决策者心理角度看, 有其产 生的必然因素。通过角色模拟实验, 分析前景理论的各效应在不同决策方式(个体决 策、直接集体决策和先个体后集体决策) 下对恶性增资心理倾向的不同影响, 进而探 讨采取特定的决策方式是否能够有效地对恶性增资倾向进行控制。结论表明, 先个 体后集体的决策方式可以较好地规避前景理论效应。 Translated and revised from Zhongguo gongye jingji 中国工业经济（China Industrial Economy), 2007, (4): 13–20 LIU Zhiyuan ( ) School of Business, Nankai University, Tianjin 300071, China E-mail: [email protected] LIU Qing Department of Accounting, School of Business, Nankai University, Tianjin 300071, China E-mail: [email protected] 34 LIU Zhiyuan, LIU Qing 关键词 恶性增资，集体决策，前景理论 1 Introduction Previous research(Staw, 1976, 1981; Bazerman et al., 1984) has found that individuals who are responsible for a previous decision tend to make increasing commitment to the previously chosen course of action even when the outcome of the previous decision turned out to be negative.
    [Show full text]
  • On Public Sector Project Management in a Small Island Development State
    buildings Case Report Implications of ‘Lock-in’ on Public Sector Project Management in a Small Island Development State Aaron Anil Chadee 1,* , Xsitaaz Twinkle Chadee 2 , Abrahams Mwasha 1 and Hector Hugh Martin 3 1 Department of Civil and Environmental Engineering, The University of the West Indies, St Augustine 330110, Trinidad and Tobago; [email protected] 2 Department of Physics, The University of the West Indies, St Augustine 330110, Trinidad and Tobago; [email protected] 3 School of Civil Engineering and Built Environment, Liverpool John Moores University, Liverpool 72046, UK; [email protected] * Correspondence: [email protected]; Abstract: The concept of ‘Lock-In’, or the escalating cost of overcommitment on a project to a failing course of action, has unforeseeable implications in project management. This paper presents a case study on the occurrence and consequences of lock-in within the context of public sector housing projects in a small island developing state (SIDS). It demonstrates that cost overruns continue beyond the commissioning phase and throughout the project’s lifecycle, even though technical contingencies were implemented to deliver the intended project benefits. The findings unpack the implications of political expediency as a strategic tool mobilised to supersede proper technical decision-making prior to project execution. It concludes that project practitioners’ commitment to select and continue with a sub-optimal project can lead to the implementation of ineffective solutions to justify their actions, resulting in failed outcomes with negative social consequences. This research helps to advance project Citation: Chadee, A.A.; Chadee, X.T.; management knowledge in the us-er/operation phase, because previous scholarly work was limited Mwasha, A.; Martin, H.H.
    [Show full text]
  • Bjarke Nielsen Og Peter Bierre
    An Analysis of Mergers and Acquisitions during the Recent Merger Wave in Scandinavia Master’s Thesis M.Sc. Finance & Strategic Management Advisor: Thomas Poulsen Department of International Economics and Management Authors: Bjarke Nielsen Peter Bierregaard Date for submission: June 16 th 2010 Number of characters including spaces plus figures (STUs): 265.892 ~ 116.9 pages Executive summary This thesis focuses on the performance of mergers and acquisitions during the recent Scandinavian merger wave. The number of acquisitions fluctuates over time, and it is interesting that empirical studies find a considerable number of acquisitions struggling to create value. This fact motivates the focus on the motives behind the value decreasing acquisitions from an agency and behavioral perspective. Hence, the thesis examines how agency theory and behavioral economics can explain underperforming acquisitions, and seeks to set up a number of recommendations that can be used proactively to prevent these. The thesis develops theoretical arguments for value destroying motives which bases the ground for eight hypotheses. Related to agency theory, M&A motivated by empire building, managerial risk aversion, managerial entrenchment and private benefits of control have a direct theoretical effect on merger performance. Likewise, hypotheses are set up for herd behavior/anchoring, overconfidence, the confirmation trap and escalation of commitment which all are value decreasing motives founded in behavioral economics. A sample of 579 Scandinavian acquisitions is examined. The acquisitions were completed within the period of 2001-2006 and it covers the trough and peak period of the recent merger wave. Through an operating performance analysis it is evident that 49.57 % of the mergers underperform compared to their peers.
    [Show full text]
  • ECO 798 - Behavioral Economics and Decision Making
    ECO 798 - Behavioral Economics and Decision Making Fall 2019 Instructor: Rafael A. Tenorio Office: 6132 DePaul Center Telephone: (312) 362-8309 E-mail: [email protected] Class Meetings: Tuesdays, 5:45-9, DPC 8207. Office hours: One hour prior to class, and by appointment. I will also answer e-mail messages as quickly as possible. Course Goals and Description The collaboration between economists, psychologists, and other behavioral scientists has grown by leaps and bounds over the past twenty years. This interaction has created the field of Behavioral Economics, which studies the psychological processes and biases underlying decision making in economics and other connected areas. The purpose of this course is two-fold. First, we will discuss some of the most robust and relevant theoretical and empirical findings in Behavioral Economics. Second, we will examine a variety of applications in economics, business, and policy environments. This approach will allow us to both understand how individuals and organizations make decisions (good and not so good!), and develop methodologies to address the various challenges that these decision makers face. Text and Materials The following two books contain the basics of most of the topics we will discuss: Thinking, Fast and Slow, by Daniel Kahneman. Judgment in Managerial Decision Making, by Max Bazerman and Don Moore, 8e. A different edition is OK, as long as you identify how the various chapters map into the relevant topics we cover. Other really good Behavioral Economics books are: Misbehaving, by Richard Thaler. Nudge, by Richard Thaler and Cass Sunstein, and The Undoing Project, by Michael Lewis. The Behavioral Economics Guides (2014-2019), free to download from behavioraleconomics.com, are also great sources of relevant material.
    [Show full text]
  • Competitive Escalation and Interventions
    University of Plymouth PEARL https://pearl.plymouth.ac.uk Faculty of Health: Medicine, Dentistry and Human Sciences School of Psychology 2018-12 Competitive escalation and interventions Hafenbradl, S http://hdl.handle.net/10026.1/16545 10.1002/bdm.2084 Journal of Behavioral Decision Making Wiley All content in PEARL is protected by copyright law. Author manuscripts are made available in accordance with publisher policies. Please cite only the published version using the details provided on the item record or document. In the absence of an open licence (e.g. Creative Commons), permissions for further reuse of content should be sought from the publisher or author. Running head: Competitive Escalation Competitive Escalation and Interventions Sebastian Hafenbrädl IESE Business School, Barcelona, Spain Jan K. Woike Max Planck Institute for Human Development, Berlin, Germany Forthcoming at the Journal of Behavioral Decision Making Address correspondence to: Sebastian Hafenbrädl Department of Managing People in Organizations IESE Business School Av. Pearson 21, 08034 Barcelona, Spain [email protected] 2 Competitive Escalation and Interventions Abstract (max 250 words) Competitive escalation occurs frequently in managerial environments, when decisions create sunk costs and decision makers compete under time pressure. In a series of experiments using a minimal dollar auction paradigm, we test interventions to prevent competitive escalation. Without any intervention, most people, including experienced managers, escalate and lose money by bidding more than the price is worth (e.g., more than 10 € for 10 €). We test several interventions, in which we provide individuals with different types of experience: direct experience in structurally identical and in structurally similar situations, as well as direct experience in similarly competitive situations (lacking the escalation dimension).
    [Show full text]
  • Second-Price All-Pay Auctions and Best-Reply Matching Equilibria Gisèle Umbhauer
    Second-Price All-Pay Auctions and Best-Reply Matching Equilibria Gisèle Umbhauer To cite this version: Gisèle Umbhauer. Second-Price All-Pay Auctions and Best-Reply Matching Equilibria. International Game Theory Review, World Scientific Publishing, 2019, 21 (02), 10.1142/S0219198919400097. hal- 03164468 HAL Id: hal-03164468 https://hal.archives-ouvertes.fr/hal-03164468 Submitted on 9 Mar 2021 HAL is a multi-disciplinary open access L’archive ouverte pluridisciplinaire HAL, est archive for the deposit and dissemination of sci- destinée au dépôt et à la diffusion de documents entific research documents, whether they are pub- scientifiques de niveau recherche, publiés ou non, lished or not. The documents may come from émanant des établissements d’enseignement et de teaching and research institutions in France or recherche français ou étrangers, des laboratoires abroad, or from public or private research centers. publics ou privés. SECOND-PRICE ALL-PAY AUCTIONS AND BEST-REPLY MATCHING EQUILIBRIA Gisèle UMBHAUER. Bureau d’Economie Théorique et Appliquée, University of Strasbourg, Strasbourg, France [email protected] Accepted October 2018 Published in International Game Theory Review, Vol 21, Issue 2, 40 pages, 2019 DOI 10.1142/S0219198919400097 The paper studies second-price all-pay auctions - wars of attrition - in a new way, based on classroom experiments and Kosfeld et al.’s best-reply matching equilibrium. Two players fight over a prize of value V, and submit bids not exceeding a budget M; both pay the lowest bid and the prize goes to the highest bidder. The behavior probability distributions in the classroom experiments are strikingly different from the mixed Nash equilibrium.
    [Show full text]