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Timid Choices and Bold Forecasts: A Cognitive Perspective on Risk Taking

Daniel Kahneman and Dan Lovallo
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Daniel Kahneman: Department of Psychology, University of California, Berkeley, California 94720
Dan Lovallo: Walter A. Haas School of Business Administration, University of California, Berkeley, California 94720

Management Science, 1993, vol. 39, issue 1, 17-31

Abstract: Decision makers have a strong tendency to consider problems as unique. They isolate the current choice from future opportunities and neglect the statistics of the past in evaluating current plans. Overly cautious attitudes to risk result from a failure to appreciate the effects of statistical aggregation in mitigating relative risk. Overly optimistic forecasts result from the adoption of an inside view of the problem, which anchors predictions on plans and scenarios. The conflicting biases are documented in psychological research. Possible implications for decision making in organizations are examined.

Keywords: decision making; risk; forecasting; managerial cognition (search for similar items in EconPapers)
Date: 1993
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