Cognitive Biases and Human Resource Management

1
Cognitive Biases and Human Resource Management

• Prepared for Presentation at the ASHRM
• June 8, 2008
• Asghar Zardkoohi
• Department of Management
• Texas AM University
• May 2008

2
Prospect Theory

• Maurice Allais
• Inconsistent choices A, B, C
• Kahneman Tversky Prospect Theory
• Evaluations based on a point of reference
• The displeasure of a loss exceeds the pleasure of
  a gain of the same amount
• Framing effect

3
Choice Process and Decision Making Prospect
Theory
Action
Decision Context
Decision Making
Choice Process
Information

• Editing
• Evaluation

Inaction
Elements of Cognition
4
An Example Isolation Effect

• I. Option A Option B
• (4,000, 0.20) (3,000,
  0.25)
• 64 36
• II. An investment project involves two stages.
  There is only a 25 chance to get to the second
  stage successfully (i.e., there is a 75
  probability of failure). If you get to the
  second stage you will have two options to choose
  from
• Option A Option B
• (4,000, 0.80) (3,000,
  1.0)
• 14 86

5
Cognitive Biases

• Endowment status quo effects
• Perception of information effect
• Overconfidence
• Framing issues

6
Endowment Status Effects

• Experiment Chocolate bar or Coffee Mug?

OR
.
7
Endowment the Status Quo Effects Two HRM
Applications

• Which one is more motivating?
• Paying for successful performance, or
• Punishing for failure
• Application (I) The concept of EFFICIENCY WAGE
  (i.e., paying a premium wage)
• Case Five Star Beverage
• Application (II) It is difficult to change HRP
• Also the new policy may not be consistent with
  attributes of the workforce

8
Perception of Information Bias Remembering self
versus experiencing self
The cold water experiment
Pain
Pain
A
B
A
Time
Time
60 sec.
60 sec.
90 sec.
9
Remembering self versus experiencing self Two
HRM Applications

• Decisions are based on the information we
  remember, not on the actual experiences we go
  through
• Application (I) Accuracy of performance
  evaluation
• Recency of evaluation
• Frequency of evaluation
• How often do you see the employee
• Application (II) Designing work schedule

Pain
b
c
d
a
Time
Start End

10
Overconfidence

• One of the most powerful attributes of
  individuals is to exaggerate their own talents,
  to believe they are above average in their gift
  of positive traits and abilities.
• In a survey of 1 million students conducted by
  the College Board in the 1970s the following
  results were obtained
• 70 of the students said they were above average
  in leadership ability, while only 2 rated
  themselves below average
• 60 rated themselves above the median in athletic
  ability, while only 6 rated themselves below the
  median.
• 60 of the students rated themselves to be in the
  top decile in getting along with others, and 25
  considered themselves in the top 1

11
Overconfidence HRM Applications

• Application (I) Attribution
• Positive me
• Negativeexternal factors
• Application (II) Staying with a course of action
  even if the results are negative
• Escalation of Commitmentprospect theory
• Retention
• Investment strategy

12
The Framing Effect Experiment I

• A large company has recently been affected by a
  number of economic difficulties, and it appears
  as if three plants need to be closed and 6,000
  employees laid off. The vice president of
  production has been exploring alternative ways to
  avoid this crisis. The vice president has
  developed two plans
• Plan A This plan will save one of the three
  plants and 2,000 jobs. gt80
• Plan B This plan has a 1/3 probability of saving
  all three plants and all 6,000 jobs, but has a
  2/3 probability of saving no plants and no jobs.
  lt20

13
The Framing Effect Experiment II

• A large company has recently been affected by a
  number of economic difficulties, and it appears
  as if three plants need to be closed and 6,000
  employees laid off. The vice president of
  production has been exploring alternative ways to
  avoid this crisis. The vice president has
  developed two plans
• Plan C This plan will result in the loss of two
  of the three plants and 4,000 jobs.
  lt20
• Plan D This plan has a 2/3 probability of
  resulting in the loss of all three plants and all
  6,000 jobs, but has a 1/3 probability of losing
  no plants and no jobs. gt80

14
The Framing Effect An HRM Application

• Application (I) Feedback and Risk Taking
• Guardian tasks
• Star tasks