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  • Writer's pictureEvelyn Chen

Avoiding Errors in Individual and Group Decision-Making

This article focuses on heuristics as the factor which might cause biases in decisions made by individuals whilst focusing on groupthink as the factor which might cause errors in the judgements made by groups. For heuristics, critical discussion focuses on the fact that heuristics can also produce good judgements depending on the particular decision scenario. Critical discussion for groupthink focuses on the benefits of groupthink for group performance and decision-making. Whilst this article discusses how those factors cause biases in decision-making, this article also seeks to examine the positive effects those factors have on decision-making.

A critical discussion of heuristics

Heuristics are strategies people adopt to make fast decisions and simplify the decision-making process. Heuristics occur because of bounded rationality, which states that human judgement is subject to cognitive imitations (Herbert, 1957). Limitations include the amount of time and information available to decision-makers and their overall intelligence. The psychologists Tversky and Kahneman founded the study of heuristics and showed that heuristics may cause systemic bias.

For example, the confirmation heuristic occurs when people seek information to confirm their pre-existing beliefs and ignore information that contradicts their pre-existing beliefs. This confirmation heuristic leads to the bias of overconfidence, according to Bazerman and Moore (2009). They argue that the bias arises because ‘the human mind is better at searching memory for confirming rather than disconfirming evidence’. Due to the decision-makers now possessing a great amount of overwhelming evidence which supports their pre-existing belief, people overestimate the reliability of their judgements (Koriat, Lichtenstein, & Fischhoff, 1980).

One real-world example of this is Ahmad and Shah’s 2020 study, which found that for Pakistan investors, the more overconfident an investor is, the less seriously they regard risk, resulting in lower investment performance. The 2020 finding is the same as the findings from studies across the world such as in 2015 by Yaowen et al. on students at Taiyuan University as well Park et al. (2010) on South Korean investors. The fact that Ahmad and Shah’s findings were replicated on a global scale shows that the overconfidence bias is a universal problem in the financial industry.

Whilst heuristics may lead to systemic bias and thus poor decisions, heuristics may also lead to good decisions. Schreibehenne and von Helveren (2009) found that ‘simple

heuristics ... outperform optimization methods in complex decision tasks across a wide range of situations,’ because they focus only on relevant pieces of information; heuristics are ‘adapted to a specific task environment’ and ‘able to ignore a great deal of information, which makes them less vulnerable to random noise’.

Examples of heuristics helping people make good decisions in the real world include the use of the 1/N heuristic in the financial asset allocation industry. Huberman and Jiang (2006) found that when deciding on which funds to invest, the majority of people chose a small number of funds, and then allocated their money evenly across them, a strategy known as the 1/N heuristic. In a comparison of 14 optimization models for portfolio choice across several empirical data sets, De Miguel et al (2007) found that the 1/N heuristic did consistently better in terms of Sharpe ratio, certainty-equivalent return, or turnover than other more complex portfolio optimisation models such as the portfolio risk-return profile.

Nevertheless, the 1/N heuristic underperformed against optimization models in situations where the number of investable assets is small, the assets differ widely in their return, and the estimation window is long. This shows that the usefulness of a heuristic is context-dependent: heuristics cannot be useful in every situation. Heuristics can only solve a specific decision scenario because they ‘exploit the structure of information in the environment’ (Schreibehenne and von Helveren). Therefore, heuristics do not inherently lead to biases or errors in decisions; rather it is whether people pick the right heuristic for the problem they face.

A critical discussion of groupthink

Groupthink is when people seek to conform with their group members and so disregard alternative ideas and new information (Yetiv, 2003). As a result, the decisions made through groupthink may not be the most optimal (Macleod, 2011). The consequences of groupthink result in the following errors:

  1. Diffusion of responsibility—when people in groups fail to behave in a moral manner because they expect other members to that instead. One real world example of this is the death of Raymond Zack in 2011, in which the police, coastguard and fire department were called to prevent his suicide but failed to do so as they expected each other to intervene first.

  2. Free riding — when participants are not fully rewarded for their contribution, they have an incentive to take a free ride, decreasing their efforts and contributing less to the group. This leads to a smaller output than if they did the work individually.

  3. Opinion polarisation—when individuals who join a group discover that their teammates have the same opinion as them, their belief in the correctness of that opinion increases. Whyte (1993) conducted an experiment which confirms this. Groups and individuals were asked to judge whether to continue or abandon a poorly performing project. 69% of individuals and 86% of groups chose the wrong choice, an occurrence which was greater in groups than individuals.

  4. Overconfidence—Rather than being checked by the group, individuals’ overconfidence is amplified by the pressure to conform. This can be shown when more women join the traditionally male-dominated boards of directors and disrupt the homogeneity of the boards, causing the boards to take less risks during mergers and acquisitions (Levi et al., 2013).

Whilst there are countless studies on how groupthink can lead to bad decisions, Choi and Kim (1999) found in their study that some indicators of groupthink led to positive outcomes in decision-making processes. Specifically, the illusion of invulnerability, belief in inherent group morality, and illusion of unanimity had ‘negative correlations with concurrence seeking and defective decision making’ and ‘positive correlations with both internal and external team activities and with reported team performance’.

The participants were team-members working in corporations. They were given surveys asking them to evaluate their team performance during a challenging time in their careers. The participants judged their decisions to be ‘defective’ depending on the cost-effectiveness of the crisis-management process; congruence of the outcome with the performance goals of the team and team members' satisfaction with the outcome.

Choi and Kim explain their findings by hypothesising that ‘strong group identity can provide a source of emotional solidarity and high morale that strengthen the members' motivation to persist’ against external threats and ‘seek and consider criticisms from outside the group’. Their theory is echoed by Zaccaro et al (1995), who found that ‘the sense of invulnerability, morality, and unanimity perceived by team members may reflect their judgment of the overall team ability to act and engender a sense of collective competence’, leading to better group performance and thus better decisions being made.

Choi and Kim defend against the potential claim that their findings were caused by measurement errors, stating that their study’s results were ‘too systematic and too strong’ to be caused by measurement errors. Nevertheless, their data might be subject to fundamental attribution errors from participants when evaluating their findings. The fundamental attribution errors refer to the possibility that because their research design ‘includes retrospective data collection, participants [can] reconstruct their experiences’

i.e., after achieving a good outcome, participants may remember their team as more united, ethical and competent than they actually were.

Therefore, the relationship between groupthink and the quality of the decision being made may have an inverted U shape rather than a linear relationship. As group identity increases, the team performance and thus the quality of decisions being made may increase for the reasons Choi and Kim found. However, once the group identity reaches a turning point, team performance and thus the quality of decisions being made start to fall for the reasons suggested by Janis (1982). Further research needs to be conducted to confirm this inverted-U relationship between groupthink and the quality of decisions being made by a group.

Conclusion

Because of the limitations of an individual's cognitive abilities, people use heuristics to make decisions, which causes biases and errors in their decisions. Due to peer pressure compelling group members to agree with the most popular opinion, groupthink occurs, causing errors to arise in decisions made by groups. However, in some circumstances, heuristics can lead to the correct decision being made by individuals for the reasons found by Schreibehenne and von Helveren. The correct amount of groupthink can also help groups make better decisions for the reasons found by Choi and Kim. Whilst there is a great deal of research on how those factors might cause biases in the decisions made by individuals and groups, more research should be done on the positive effects those factors have on decision-making and the circumstances in which positive outcomes can occur.


 

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