Saturday, February 17, 2007

The limits of Psychological Traps

Hammond, Keeney, and Raiffa [1998] formulated several psychological traps relevant to the discussion of the limits in relation to capital market expectations CME. These traps undermine an analyst's ability to make accurate and unbiased forecasts.

  • anchoring trap, -the mind gives heavy weight on first information it receives [hence first impressions]. Everyone seems to compare most things to the first presentation or info received. Overcome this, by not making premature conclusions.
  • status quo trap, - tendency to believe that most recent observations will effect future. Use a rationale DM process to overcome.
  • confirming evidence trap, - bias giving more weight to information that supports an existing or preferred point of view instead of info that contradicts. To ensure objectivity:
    be equal to all evidence, enlist independent thinkers to argue your preferred conclusion,
    be honest about your motives
  • overconfidence trap, - people overestimate the accuracy of their forecasts. Widen the range of possibilities around the primary forecast.
  • prudence trap, - to temper forecasts so they don't appear extreme. Decisions that are big tend to have more caution. Widen the range of possibilities around the primary forecast. Review sensitive estimates in light of supporting analysis.
  • recallability trap- forecasts to be influenced by events that left a strong impression on a persons memory. Ground your conclusions with objective data and process rather than personal emotion and memory.
John S. Hammond is an internationally known decision-making consultant specializing in negotiation and corporate strategy, and a former professor at Harvard Business School. Ralph L. Keeney is a professor in the Marshall School of Business at the University of Southern California, a member of the National Academy of Engineering, and a well-known decision-making consultant. Howard Raiffa, a pioneer in developing decision and negotiating analysis, is professor emeritus at Harvard Business School, and the author of The Art and Science of Negotiation. He has extensively taught decision making to students of business, public policy, law, and medicine.

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