54 Contract Management | June 2010Overcoming Barriers to Effective Decision-Making 55 Contract Management | June 2010An examination of cognitive… [608445]

54 Contract Management | June 2010Overcoming Barriers to
Effective Decision-Making

55 Contract Management | June 2010An examination of cognitive biases
that cause us to make poor decisions. BY John K. Borchardt

56 Contract Management | June 2010Making decisions is a complex process
with psychological, social, and emotional
components. By fully understanding these
components, you can better control them
and make better decisions.
Effective decision-making is an interdisciplin –
ary process that involves applying social psychology, group dynamics, and manage –
ment theory. An important part of making a good decision is accurately defining the problem. Only then can you solve it.
However, hidden difficulties, such as cogni –
tive biases, often cause the most challenges
in making effective decisions, often leading
us to make poor decisions. These mental
barriers are often subconscious. Cognitive biases are present both in individuals and
in teams choosing options and making deci –
sions. However, there are ways to recognize
and overcome these barriers. Common
barriers include:
Personal overconfidence, ƒ
Confirmation bias, ƒ
The “sunk cost trap,” ƒ
The “recency” effect, ƒAnchoring bias, ƒ
The overconfidence effect, and ƒ
Illusory correlations. ƒ
Personal Overconfidence
“Psychologists have shown that hu –
man beings are systematically over –
confident in our judgments,” com –
ments Michael Roberto, professor of management at Bryant University.
2
Personal overconfidence can cause
poor judgment and result in making
decisions, often high-risk decisions,
without giving sufficient weight
to negative factors. It can also
often lead to managers not giving
sufficient weight to others whose
opinions differ from their own. This
barrier to effective decision-making
is more common to high performers
who are very self-confident.
To guard against overconfidence
when negotiating contracts,
contract managers should have
proposed contracts reviewed by
their supervisors or fellow mem –
bers of their work group. However,
work groups may also be suscep -tible to the overconfidence trap by
being overly reliant on their own
assessment of situations requiring
decisions and not going outside
the group for other opinions.
Confirmation Bias
In some ways confirmation bias is
a special case of personal overcon –
fidence. Confirmation bias often
comes into play when we have
to justify our decisions to others;
it leads us to rely primarily on information that is consistent with
our existing views and supports our
preferred decision while deempha –
sizing and even ignoring informa –
tion contradictory to these views.
3
Confirmation bias can occur when
a contractor organization has a
lengthy history of performing good
work. The contract manager may
be overconfident in the contractor’s
ability to fulfill a contract to supply a new or different type of service
or goods because of this history.
Cordial working relationships with
the contractor can also lead to
confirmation bias.
However, confirmation bias isn’t
always a bad thing. Attorneys actually rely on it frequently. Their
job in the courtroom is to advocate
one point of view. They overweigh
the evidence in support of this view
and ignore or dismiss contradictory
evidence. However, this is not a
viable strategy for contract manag –
ers except possibly as a contract
negotiation strategy. Further,
contract managers’ preference for
information that supports their
preferred decision and bias against
information contradictory to it is
The essence of management,
especially contract management,
is effective decision-making. However, few people have received
any systematic training in how to
make decisions. Most people are
entirely self-trained in this regard.
1 Overc Oming barriers t O effective decisi On-making

Contract Management | June 2010 57often unconscious. They usually do not
intend to treat evidence in a biased way and
are not aware they are doing so. Encourag –
ing group decision-making or obtaining the
advice of others can reduce the probability
of confirmation bias occurring.
The Sunk Cost Trap
The sunk cost trap “refers to the tendency
for people to escalate commitment to a
course of action in which they have made
substantial prior investments of time, mon –
ey, or other resources,” explains Professor
Roberto.4 Many managers often believe that
with modest increments of money, time,
and effort, they can achieve the goals of
an expensive project that has so far proved
fruitless. It can lead to the unproductive exercise of throwing good money after bad
ideas in an effort to make a project succeed,
despite the lack of previous success. The
sunk cost trap leads one to focus too much
on the money, time, and effort already expended rather than how additional re –
sources can be spent more profitably.
I observed a good example of this at a
company I worked for early in my career.
Contract research appeared to have
developed an exciting new plastic. The
company took the project in-house to
build a pilot plant that would scale the
process up, providing ample quantities
of samples for customer evaluations. If
successful, this would have been the first step to building a successful new busi –
ness. However, the plastic produced in the pilot plant had properties inferior to that produced on the small laboratory
scale. Despite years of effort, engineers
were unable to substantially improve the
properties of the plastic produced in the pilot plant. The company continued to try
to debug the pilot plant and also returned to laboratory research hoping to develop
a method of making the product more
cheaply to compensate for its lower per –
formance properties. While the laboratory
work was successful, the cost reduction
proved insufficient to compensate for the
lower performance of the plastic.
Expenditures over several years had bal –
looned to the point where this project be –
came the most expensive the company had ever undertaken. A new vice president of Overc Oming barriers t O effective decisi On-making

research forced the laboratory manager into
early retirement. The project leaders were
laid off. The pilot plant was shut down and
some of the engineering and operating staff
lost their jobs as well. So, in addition to
too much money being spent to no positive
effect, several people, including some who
had no role in the decision-making process,
lost their jobs as well.
The Recency Effect
The “recency” effect is the overreliance on
information most readily available to us in
making decisions. This is usually the most recent information. With the advent of the
Internet, much older information not avail –
able online is often ignored. In many cases
decision-makers are not even aware of its
existence. This is also true for older propri –
etary reports that were never transferred to
an organization’s intranet.
The recency effect occurs frequently in
managers’ decision-making. One of the most common occurrences happens during managers’ annual performance evaluations
of staff members. Recent performance
plays a greater role in these evaluations and
tends to get weighed more heavily than ac –
complishments that occurred earlier in the
review period. The recency effect can also cause contract
work to deviate from desired goals. For
example, I contracted with a university chemical engineering professor to have
his group perform studies in support of
my then employer’s product development program. Early work on the project led to
some results the professor was quite excited
about. Rather than stick with the program as defined in the contract, he veered off
course to perform basic research expanding on these results. Milestones were missed
and the project fell behind schedule. It was
only on reading his quarterly report that I,
as contract manager, became aware of the problem. It led to some resentment when I
insisted that the professor return to fulfill –
ing the terms of the contract.
The rapid advance of new knowledge in
many fields often can be applied to older
technology that was never commercialized
or has gone out of favor. However, these ap –
plications can never be suggested or made
if decision-makers are unaware of this older
technology’s existence because information
about it is inaccessible using only computers
to search for it. This problem is being made
worse because many organizations and
some libraries are purging older reference
materials only available in hardcopy format
or formats that cannot be located using
online search engines.
Anchoring Bias
Anchoring bias “refers to the notion that we
sometimes allow an initial reference point
to distort our estimates,” says Professor
Roberto.5 One overly relies on specific infor –
mation in making a decision. For example,
consumers use the suggested retail price
sticker on an automobile to affect their
purchase negotiations with car dealers and
often pay a higher price than necessary.
Anchoring bias can occur when negotiat –
ing renewal of a contract or negotiating a
new contract. In this context, anchoring
bias occurs through the use of the previous
contract terms as a starting point in nego –
tiating a new contract. By unconsciously
using the anchoring bias, the contracting party may contract and
pay for services it doesn’t really need as part of a
contract renewal or new contract. The disadvan –
tage to the contracting
party is obvious: the
contract manager is
paying for services his or
her organization doesn’t
really need. However, in
the same situation the
anchoring bias can also
be disadvantageous to
the contractor perform –
ing the work. Additional,
nonessential work may in –
crease costs while making
it more difficult to meet
deadlines, and the ad –
ditional revenue created
by the nonessential work
may not fully compensate
for these disadvantages.
Anchoring bias can also
be to the detriment of the
contractor if it does not
allow for increased costs
the contractor must bear
in supplying the specified
goods or services.
Anchoring bias can also
occur when the cost of supplying goods or
services specified in the
contract changes. For example, in the last four
years the cost of laptop
computers has dropped
substantially, even as
computer capabilities
have increased. When
contracting with a firm
to supply computers
preloaded with specified
software, the contract
manager should not let anchoring bias towards a previous, more expensive
contract affect negotia –
tions. Should this occur,
his or her organization Overc Oming barriers t O effective decisi On-making
To guard against
overconfidence when
negotiating contracts,
contract managers should have proposed
contracts reviewed
by their supervisors or fellow members of
their work group.
58 Contract Management | June 2010

Contract Management | June 2010 59
will be paying more than necessary for the
customized software-loaded computers.
As noted above, anchoring bias can also
be to the detriment of the contractor. For
example, the costs of copper and steel have
dropped substantially from their 2007 value.
If a contract is being negotiated for the
supply of copper wire and steel beams for a
construction project, the negotiations may
be unnecessarily drawn out if the supplier’s
contract manager is affected by anchoring
bias and insists on unnecessarily high prices
for the delivered copper wire.
Professor Roberto has noted that one can
use the anchoring bias to one’s advantage
in contract negotiations. “Starting from
an extreme position may serve as an
anchor, and the other side may find itself
adjusting from that initial arbitrary point,”
he explained.6
I first encountered the anchoring bias in
negotiations between an oilfield services
firm I worked for and a chemical supplier. The supplier adopted an extreme
position in terms of both the price and quantity of a chemical used
by my employer. With the supplier holding stubbornly to this anchor –
ing point, my supervisor repeatedly
adjusted the amount of chemical to
be purchased to a quantity closer
to the supplier’s anchoring value.
Eventually my employer paid signifi –
cantly more than they wanted to for
a supply of the chemical larger than
they could really use. It took two
years to work off the inventory of
the chemical they purchased unnec –
essarily. It turned out that the sup –
plier was going to cease producing
this chemical and wanted to sell its
entire inventory. Of course, had my employer known this, my supervisor could have negotiated a much more
advantageous price.
Overc Oming barriers t O effective decisi On-making

60 Contract Management | June 2010
Overconfidence Effect
Many people tend to overestimate their
abilities. Organizations (i.e., teams of
managers and experts) often overestimate
the ability of their organization to solve
problems and meet deadlines. In contract negotiations, the performing organization may overestimate the speed at which it can perform the required work. Consequently, it may agree to deadlines that it cannot meet, resulting in penalty fees.
In the case of the sunk cost example cited
above, repeated overconfidence in the orga –
nization’s abilities to solve a difficult problem
with additional increments of money and
effort resulted in the development program
being continued for at least one year and
probably two after managers should have cut
their losses and terminated the project.Illusory Correlations
As Professor Roberto observes, “[i]llusory cor –
relation refers to the fact that we sometimes
jump to conclusions about the relationship
between two variables when no relationship
exists.”7 For example, a contract manager
may assume there will be a correlation
between the performance of an organiza –
tion in fulfilling a contract and the presence
of well-known experts on its staff. This
may lead to high payments to the fulfilling
organization. However, this correlation may
be illusory if the outstanding experts are not
on the project team fulfilling the contract, or
function only as occasional consultants who
are busy with other responsibilities and not
fully focused on the project.
Another example is when hiring managers
place too much reliance on a job candidate’s
verbal presentation skills, believing there
is a strong correlation of these skills with
the skills required for excellent job perfor –
mance. This illusory correlation can lead to
hiring second-rate candidates who present
themselves well.
Overcoming Cognitive Biases
How can we overcome these biases in our
own decision-making? Professor Roberto
has advocated four measures to minimize
the influence of cognitive biases on our
decision-making8:
We must become more aware of these 1 |
biases. We must also make our col –
leagues with whom we work aware of
them as well.
We can review our own past decisions 2 |
to determine if we are particularly
susceptible to some of these biases.
We can get the input of unbiased ex – 3 |
perts—e.g., consultants not emotion –
ally invested in the decision—before making that decision.
We must recognize that our biases
4 |
are often rooted in human nature and may influence decisions despite our
efforts. Therefore, we should get rapid
feedback on the effectiveness of our decisions so we don’t repeat mistakes
and can change poor decisions before
they become too costly.
However, perhaps the best way to overcome
decision-making biases is to develop a system –
atic process to employ when making decisions.
Edward Russo, professor of marketing and
behavior science at Cornell University, and
Paul Shoemaker, research director of the
Wharton Business School Mack Center for
Technology and Innovation, advocate a
four-step decision-making process that helps
eliminate cognitive biases.
9 The four steps
are as follows:
Framing the problem or the decision 1 |
to be made— Frames are mental mod –
els we use to explain our understand –
ing of the situation in question. They involve making assumptions which can
be affected by our cognitive biases.
Gathering information—
2 | The second
step, gathering information, can help
overcome our cognitive biases, pro –
vided we do not fall prey to biases such
as the recency effect.
Coming to conclusions—3 | The third
step is using this information to come
to conclusions that determine the deci –
sion we make.
Learning from experience—4 | The
fourth step is later assessing the re –
sults of our decision and learning from
the experience so that any errors made
are not repeated in the future.
It’s not easy to improve one’s decision-mak –
ing. Frank Harrison, author of The Manageri –
al Decision-Making Process , notes: “Decision-
making is not a quantitative science.”10
He views it as a multidimensional process
involving personal values, psychology, soci –
ology, social psychology, and politics.
Harvard Business School professor Max Bazerman and Don Moore, Carnegie Mellon
University associate professor of organiza –
tional behavior, offer a six-step process
11: Overc Oming barriers t O effective decisi On-making
Anchoring bias
can occur when
negotiating renewal
of a contract or negotiating a new
contract.

Contract Management | June 2010 61Define and thoroughly understand the 1 |
problem (Bazerman and Moore note
that many go into a situation without
thoroughly understanding the problem).
Identify the important criteria that must 2 |
be considered in making a decision.
Determine the relative importance of 3 |
the criteria.
Develop alternative solutions to the 4 |
problem.
Rate each alternative solution on how 5 |
well it satisfies each of the criteria
developed in Step 2 (Bazerman and Moore note that this is usually the
most difficult part of the decision-making process).
Finally, determine which alternative
6 |
solution is the best and implement it.
Overcoming cognitive bias is essential in
making good decisions during the contract management process. While some may be –
lieve decision-making is completely innate or
only gained through long years of manage –
ment experience, it is also a skill that can be
learned and perfected. CM
About the Author
JOHN K. BORCHARDT is a career consul –
tant and freelance writer. His book, Career
Management for Scientists and Engineers ,
was a Science Book Club Alternate Selec –
tion. He was the recipient of the 2003 Henry
Hill Award, a national award of the American
Chemical Society, for his promotion of diver –
sity in the chemical profession.
Send comments about this article to
cm@ncmahq.org.
To discuss this article with your peers
online, go to www.ncmahq.org/cm0610/
Borchardt and click on “Join Discussion.”endnotes
See, e.g 1. ., J. Edward Russo and Paul J.H. Shoe –
maker, Decision Traps: Ten Barriers to Decision-
Making and How to Overcome Them (Fireside:
1990).
Michael A. Roberto, 2. The Art of Critical Decision
Making (The Teaching Company: 2009).
Raymond S. Nickerson, “Confirmation Bias: A 3.
Ubiquitous Phenomenon Occurring in Many
Guises,” Review of Clinical Psychology , 2(2)
(1998): 175–220, accessed at http:74.125.132/
search?q=cache:amv7Yx978t4J:psy.ucsd.
edu/~mckenzie/nickersonConfirmationBias.pd
f+%22Confirmation+bias%22&cd=7&hl=en&ct=
clnk&gl=us .
Roberto, 4. op. cit .
Ibid 5. .
Ibid 6. .
Ibid 7. .
Ibid 8. .
Russo and Shoemaker, 9. see note 1.
E. Frank Harrison, 10. The Managerial Decision-
Making Process , fifth ed. (Houghton Mifflin:
1999).
Max Bazerman and Don A. Moore, 11. Judgment in
Managerial Decision-Making, seventh ed.
(Wiley: 2008).
Overc Oming barriers t O effective decisi On-making