Decision failures: why they occur and how to prevent them

Abstract

Executive Overview Imagine that your company's sole product has recently suffered a considerable market share loss, although it is still the largest selling product of its kind. You are thinking of making a radical change in your product to restore market share to traditional levels, although such a strategy may backfire and ultimately reduce market share even further. Assume an even chance for both events, and potential gains to be equivalent to potential losses. Would you agree to such a change? Now, consider that the product has recently experienced a considerable gain in market share, and is the largest selling product of its kind. You are thinking of making a radical change in your product to further increase market share, although such a strategy may backfire and ultimately reduce market share to its former level. Assume an even chance for both events, and potential gains to be equivalent to potential losses. Would you agree to such a change? Although the choices just described are objectively indistinguishable, for many people the gamble is more attractive in the first characterization because of how the decision is framed. Decisions are framed either in terms of gains or losses by the reference point from which the options are assessed. A decision outcome could be framed as both a gain and a loss, depending on which reference point is selected. How choices are framed is important, because people respond differently to losses than to gains. The impact of framing effects on risky decision making, and their role in decision errors, are illustrated with reference to several notorious failed decisions. Advice is also offered on how to reduce the incidence of decision failure by minimizing framing effects. Caution should be used whenever an important decision is framed to appear as a choice between a certain loss and greater but uncertain losses. The choice of frame is frequently arbitrary or fortuitous, and can lead to behavior that is excessively risky when viewed in light of the consequences of decision failure.

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