PACE (Practical Application for Careers and Enterprises)

Willamette MBA

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Our Unconscious Biases

 

Adams, Scott. “Dilbert.” Comic strip. In www.dilbert.com. 2011.

 

During PACE last week, we divided up into our project teams to create skits to illustrate decision-making biases. We then spent the remainder of the class period presenting our skits to the rest of the class and the class guessed what bias was presented. Below are a few of my favorites I learned last Thursday through the skits and our readings:

The Endowment Effect

The endowment effect is used in behavioral economics to explain why people value a good more highly once they own it. If I receive a free t-shirt from a giveaway, I am more likely to demand a higher price to sell the shirt than I was willing to pay for it in the first place. We tend to overvalue the goods we already own. The endowment effect explains one reason why people try to sell their coffee makers on Facebook for well over what anyone is willing to pay or why some view minimalism as a radical idea.  

One way companies use the endowment effect is through free trials. Free trials enable a customer to use the product or service before paying. The more the customer uses it, the more tied to it they become, and therefore the more likely they are to pay for it once the free trial expires. The customer values the product or service more than they would otherwise through free trial “ownership”.  

The endowment effect is often tied to a second, important bias:  

Loss Aversion

It is difficult to sell that same coffee maker above because of loss aversion. Loss aversion is our tendency to prefer to avoid losses than acquire equivalent gains. Losing the coffee maker will make us sadder than acquiring the same coffee maker will make us happy. As a result, we tend to hold on to the coffee maker.

Companies have to be very careful with their pricing strategies because of loss aversion. Customers are more sensitive to price increases than they are prices decreases. As a simple example, if a company raises the price of a gallon of milk, they could expect demand to decrease. If they lower the price of a gallon of milk, they could expect demand to increase. However, what they might not expect, holding all other things equal, is that the price increase will cause demand to decrease more than the lower price will cause the demand to increase. Our reactions to losses tend to be more emotionally powerful than our reactions to gains.

The Confirmation Bias

The heuristic explained in the Dilbert comic above, the confirmation bias, is when we search for and interpret information to confirm our preexisting beliefs. As cave people, this probably helped us avoid dangerous animals and stay alive—“the bear ate my friend yesterday–I should probably keep avoiding bears or anything that looks like a bear.” However, just like in the comic above, these days our preconceived notions can get in the way of us absorbing new information.

I highly recommend watching an episode of Shark Tank to see this bias in action over and over again. Entrepreneurs frequently continue promoting failed products because they seek out market information that confirms what they want to believe. They then face a harsh reality when Mark Cuban won’t invest in their product. Confirmation bias can prevent entrepreneurs from seeing all of the information available.

Conclusion

Through a game in PACE, we learned these decision-making biases and how they apply to our personal and professional lives. Hopefully, our education will prevent us from falling into the same trap as Dilbert’s coworker.

 


Emily Anderson is a first-year MBA candidate at Willamette University. She is a 2017 graduate of Gonzaga University, where she received her B.A. in International Studies. Emily enjoys PACE because of the opportunity to learn valuable career information, improve her analytical and speaking skills, and build partnerships with not-for-profits in Oregon.

 

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