Decision Anchoring

A nice summary of how results can be anchored just appeared on the web. This human behavior has great implications in business and technical decisions.

Anchoring sets a biased context for estimation. It is a cognitive limitation that affects the quality of our decisions. Anchoring occurs, for example, when a manager asks for an estimate with something like: "I don’t see how we could commit more than $10,000 to this." $10,000 now becomes the anchor point. This stated amount biases all the following estimates that are generated.

Anchoring can happen in subtle ways. Let’s say you are bidding on a project and you have been led to believe that the customer has a ceiling of, say, $10,000. You are now anchored to this value and will make decisions to try to force your project to fit it. This only seems logical, but it has interesting effects. First, the amount of work you propose will be descoped to fit the budget. But people always are optimistic, so, if you get the job, you will still have more work than money. Then begins the dance of working more for less money (overtime), further descoping or asking for more money. This dance is further discussed on pages 82-85 in Making Robust Decisions.

To demonstrate anchoring, I gave a group of people a simple estimation problem - asking them how long it would take them to wash a list of dishes. I described the dishes in detail, how dirty they were, and what "wash" meant. The mean estimate was 32 min with a standard deviation of 10 min. I then asked another group of subjects to estimate how long it would take to clean the dishes exactly as before, but this time I added "Your partner has told you that the kitchen needs to be clean in 15 minutes." This anchoring resulted in a new distribution with a mean of 18 minutes and a standard deviation of 6 min.

Think of the implications on decision making. All decisions are based on best estimates of past performance, assessments of the current situation, and visions of the future. Every one of these can be clouded by anchoring. You cant totally avoid it. However, you can be aware of how you word your need for information and consciously try not to anchor estimates on which decisions will be based.

A Justification is Not a Decision

There are two kinds of decision-making: justification and selection. Justification occurs when the result is a foregone conclusion — the choice is made in advance of any argument or consideration. This often happens when the boss already has his favorite option in mind and wants information to "prove" that it is the right choice. I have seen this during my career in product design and the nation saw it in President Bush's decisions about Iraq. In Maureen Dowd's NY times Op-Ed on June 1 2008, "Cult of Deception" she says that "our president is a one-man refutation of Malcolm Gladwell's best seller Blink, about the value of trusting your gut."

In an earlier blog, I discussed Blink and how trusting your gut can be the wrong approach for complex decisions, because you can't include sufficient information or study alternative courses of action. However, managers that get that warm fuzzy feeling when they know the best course of action, before they have sufficient information, can be dangerous. Of course, they may be right. If they usually are, then they clearly have sufficient information and a good decision making style. But if these justifications often end up with later fire-fighting, then justification is not working in lieu of decision-making.

Actually, the CIA has a method that is supposed to short circuit justification-thinking. It is called Analysis of Competing Hypotheses and is in a downloadable book titled "Psychology of Intelligence Analysis." Basically, ACH prescribes the following steps:

1. Identify the possible hypotheses to be considered.
2. List the significant evidence and assumptions for and against each hypothesis.
3. Draw tentative conclusions about the relative likelihood of each hypothesis.
4. Analyze sensitivity of the conclusion to critical items of evidence.
5. Identify future observations that would confirm one of the hypotheses or eliminate others.

This differs some from the process I develop in Making Robust Decisions, but both begin with basic fact that — YOU MUST HAVE ALTERNATIVES TO MAKE A DECISION. I put this in bold because it seems evident that many Washington decision makers don't follow this basic truth. In fact, many business leaders don't follow this either. In the book Why Decisions Fail, Paul Nutt gives three basic blunders. One of these, "Premature Commitments" is the the same as the justifications we are discussing here.

So what do you do to stop this kind of ineffective decision-making. The only thing to do is to set up an environment that forces multiple decisions to be considered. Sometimes this is difficult from below, but if you are a manager, insist on multiple alternatives to consider.