Advertisement

Behavioural Issues in Portfolio Decision Analysis

  • Barbara Fasolo
  • Alec Morton
  • Detlof von Winterfeldt
Chapter
Part of the International Series in Operations Research & Management Science book series (ISOR, volume 162)

Abstract

The aim of this chapter is to review some behavioural issues in portfolio choice and resource allocation decisions, with a focus on their relevance to Portfolio Decision Analysis. We survey some of behavioural literature on the most common heuristics and biases that arise in and can interfere with resource allocation processes. The common idea behind this behavioural literature is that of cognitive or motivational failure as an explanation for the violation of normative models. Then, we reflect on the relevance of this literature by drawing from the authors’ personal experiences as decision maker or decision analyst in real world resource allocation settings. We argue that justifiability can also be a reason for the normative violations. We conclude by discussing ways in which an analyst might approach debiasing.

Keywords

Resource Allocation Environmental Restoration Resource Allocation Model Equal Allocation Individual Bias 
These keywords were added by machine and not by the authors. This process is experimental and the keywords may be updated as the learning algorithm improves.

References

  1. Airoldi M, Bevan G, Morton A, Oliveira M, Smith J (2008) Estimating the health gains and cost impact of selected interventions to reduce stroke mortality and morbidity in England. Health Foundation, LondonGoogle Scholar
  2. Airoldi M, Morton A (2011) Portfolio Decision Analysis for population health. In: Salo A, Keisler J, Morton A (eds) Portfolio Decision Analysis: improved methods for resource allocation. New York, SpringerGoogle Scholar
  3. Bardolet D, Fox CR, Lovallo D (2011) Corporate Capital Allocation: A Behavioral Perspective. Strategic Management Journal (in press)Google Scholar
  4. Baron J, Spranca M (1997) Protected values. Organ Behav Hum Decis Process 70:1–16CrossRefGoogle Scholar
  5. Barrett-Howard E, Tyler TR (1986) Procedural justice as a criterion in allocation decisions. J Pers Soc Psychol 50:296–304CrossRefGoogle Scholar
  6. Benartzi S, Thaler RH (2001) Naive diversification strategies in defined contribution saving plans, American economic review. Am Econ Assoc 91:79–98Google Scholar
  7. Bromiley P (2009) A prospect theory model of resource allocation. Decis Anal 6:124–138CrossRefGoogle Scholar
  8. Cialdini R (2007) Influence: the psychology of persuasion. Harper Business, New YorkGoogle Scholar
  9. Coff RW, Laverty KJ (2001) Roadblocks to competitive advantage: how institutional constraints and decision biases hinder investments in strategic assets. J High Technol Manage Res 12:1–24CrossRefGoogle Scholar
  10. Conlon D, Garland H (1993) The role of project completion information in resource allocation decisions. Acad Manage J 36:402–413CrossRefGoogle Scholar
  11. Edwards W, von Winterfeldt D, Moody D (1988) Simplicity in decision analysis:an example and a discussion. In: Bell DE, Raiffa H, Tversky A (eds) Decision analysis: descriptive, normative, and prescriptive aspects. CUP, New YorkGoogle Scholar
  12. Fischhoff B (1982) Debiasing. In: Kahneman D, Slovic P, Tversky A (eds) Judgment under uncertainty: heuristics and biases. CUP, CambridgeGoogle Scholar
  13. Fishburn PC (1992) Utility as an additive set function. Math Oper Res 17:910–920CrossRefGoogle Scholar
  14. Fox CR, Bardolet D, Lieb D (2005) Partition dependence in decision analysis, resource allocation and consumer choice. In: Zwick R, Rapoport A (eds) Experimental business research, vol. 3: marketing, accounting, and cognitive perspectives. Kluwer, Norwell/DordrechtGoogle Scholar
  15. Gilovich T, Griffin DW, Kahneman T (2002) Heuristics and biases: the psychology of intuitive judgment. CUP, New YorkGoogle Scholar
  16. Howell JM, Sheab CM (2001) Individual differences, environmental scanning, innovation framing and champion behaviour: key predictors of project performance. J Prod Innov Manage 18:15–27CrossRefGoogle Scholar
  17. Huberman G, Jiang W (2006) Offering versus Choice in 401(k) plans: equity exposure and number of funds. J Finance 61(2):763–801CrossRefGoogle Scholar
  18. Hsee CK (1996) The evaluability hypothesis: an explanation for preference reversals between joint and separate evaluations of alternatives. Organ Behav Hum Decis Process 67:247–257CrossRefGoogle Scholar
  19. Hsee CK, Rottenstreich Y (2004) Music, pandas and muggers: on the affective psychology of value. J Exp Psychol Gen 133:23–30CrossRefGoogle Scholar
  20. Jacobi SK, Hobbs BF (2007) Quantifying and mitigating the splitting bias and other value tree-induced weighting biases. Decis Anal 4:194–210CrossRefGoogle Scholar
  21. Jenni KE, Merkhofer MW, Williams C (1995) The rise and fall of a risk-based priority system: lessons from DOE’s Environmental Restoration Priority System. Risk Anal 15:397–410CrossRefGoogle Scholar
  22. Kahneman D, Knetsch JL (1992) Valuing public goods: the purchase of moral satisfaction. J Environ Econ Manage 22:57–70CrossRefGoogle Scholar
  23. Kahneman D, Lovallo D (1993) Timid Choices and Bold Forecasts: a cognitive perspective on risk taking. Manage Sci 39(1):17–31CrossRefGoogle Scholar
  24. Keisler J (2005) When to consider synergies in project portfolio decisions. College of Management Working Paper, 27Google Scholar
  25. Kleinmuntz DN (2007) Resource allocation decisions. In: Edwards W, Miles RF, von Winterfeldt D (eds) Advances in decision analysis. CUP, CambridgeGoogle Scholar
  26. Langholtz H, Ball C, Sopchak B, Auble J (1997) Resource-allocation behavior in complex but commonplace tasks. Organ Behav Hum Decis Process 70(3):249–266CrossRefGoogle Scholar
  27. Langholtz H J, Marty AT, Ball CT, Nolan EC (2002) Resource-allocation behavior. Kluwer, NorwellCrossRefGoogle Scholar
  28. Larrick RP (2004) Debiasing. In: Koehler DJ, Harvey N (eds) Blackwell handbook of judgement and decision making. Blackwell, LondonGoogle Scholar
  29. Matheson D, Matheson JE (2007) From decision analysis to the decision organization. In: Edwards W, Miles RF, Von Winterfeldt D (eds) Advances in decision analysis. CUP, CambridgeGoogle Scholar
  30. Messick D (1993) Equality as a decision heuristic. In: Mellers BA, Baron J (eds) Psychological perspective on justice. CUP, CambridgeGoogle Scholar
  31. Morton A, Fasolo B (2009) Behavioural decision theory for multi-criteria decision analysis: a guided tour. J Oper Res Soc 60:268–275CrossRefGoogle Scholar
  32. Morton A, Bird D, Jones A, White M (2011) Decision conferencing for science prioritisation in the UK public sector: a dual case study. J Oper Res Soc 62:50–59CrossRefGoogle Scholar
  33. Northcraft GB, Neale MA (1986) Opportunity costs and the framing of resource allocation decisions. Organ Behav Hum Decis Process 37(3):348–356CrossRefGoogle Scholar
  34. Otway HJ, Pucket JM, von Winterfeldt D (1992) The priorization of environment, safety, and health activities. Technical Report. Los Alamos National Laboratory, Los AlamosGoogle Scholar
  35. Payne JW, Bettman JR, Johnson EJ (1993) The adaptive decision maker. CUP, CambridgeGoogle Scholar
  36. Petty RE, Cacioppo JT (1981) Attitudes and persuasion: classic and contemporary approaches. Wm. C. Brown, DubuqueGoogle Scholar
  37. Phillips LD, Bana e Costa CA (2007) Transparent prioritisation, budgeting and resource allocation with multi-criteria decision analysis and decision conferencing. Ann Oper Res 154:51–68Google Scholar
  38. Read D, Loewenstein G, Rabin M (1999) Choice bracketing. J Risk Uncertain 19(1–3):171–197CrossRefGoogle Scholar
  39. Roch S, Samuelson C, Allison S, Dent J (2000) Cognitive load and the equality heuristic: a two stage model of resource overconsumption in small groups. Organ Behav Hum Decis Process 83:185–212CrossRefGoogle Scholar
  40. Samuelson W, Zeckhauser RJ (1988) Status quo bias in decision making. J Risk Uncertain 1:7–59CrossRefGoogle Scholar
  41. Scharfstein D, Stein J (2000) The dark side of internal capital markets: divisional rent-seeking and inefficient investment. J Finance 55(6):2537–2564CrossRefGoogle Scholar
  42. Shafir E, Simonson I, Tversky A (1993) Reason-based choice. Cognition 49(2):11–36CrossRefGoogle Scholar
  43. Sharpe P, Keelin T (1998) How Smithkline Beecham makes better resource-allocation decisions. Harvard Business Rev 76:45–57Google Scholar
  44. Thaler RH, Shefrin HM (1981) An economic theory of self-control. J Polit Econ 89(2):392–406CrossRefGoogle Scholar
  45. Tversky A, Kahneman D (1974) Judgment under uncertainty: heuristics and biases. Science 185:1124–1131CrossRefGoogle Scholar
  46. von Winterfeldt D (1999) On the relevance of behavioral research for decision analysis. In: Shanteau J, Mellers B, Schum D (eds) Decision science and technology. Kluwer, BostonGoogle Scholar
  47. von Winterfeldt D, Edwards W (1986) Decision analysis and behavioral research. CUP, CambridgeGoogle Scholar
  48. Walster E, Walster GW, Berscheid E (1978) Equity: theory and research. Allyn & Bacon, BostonGoogle Scholar

Copyright information

© Springer Science+Business Media, LLC 2011

Authors and Affiliations

  • Barbara Fasolo
    • 1
  • Alec Morton
    • 2
  • Detlof von Winterfeldt
    • 3
  1. 1.Department of ManagementLondon School of Economics and Political ScienceLondonUK
  2. 2.Department of Management, London School of Economics and Political ScienceManagement Science GroupLondonUK
  3. 3.International Institute for Applied Systems AnalysisLaxenburgAustria

Personalised recommendations