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Question: Briefly describe three Decision Traps and explain how a leader can try to avoid being impacted by it.

26 Oct 2022,1:03 AM

 

  1. Briefly describe three Decision Traps and explain how a leader can try to avoid being impacted by it. (25 Points)

 

 

  1. You are the CEO of Cardinal Company (a small handheld technology firm) and have just been briefed on a promising new product with projected cash flows detailed below. Discuss your assessment of this project’s viability and profitability.  Explain the principles of evaluating cash inflows and outflows. Calculate payback period, total return on investment, internal rate of return, and net present value.  State any assumptions (i.e. discount rate).   Explain your reasoning behind those assumptions.(25 Points)

 

 

Year Revenue Capital Expenditures
2016 - $18,000,000
2017 $3,000,000  
2018 $4,000,000  
2019 $6,500,000  
2020 $7,500,000 $3,500,000
2021 $7,500,000  
2022 $8,000,000 $1,500,000
2023 $8,500,000  
2024 $9,000,000 $2,000,000
2025 $9,500,000  

 

 

Expert answer

 

1. The sunk cost fallacy is the trap of feeling obligated to continue investing in something simply because you have already invested so much in it. This can lead to bad decision-making because you may continue down a path even when it is no longer the best option. To avoid this trap, try to think about each decision independently and objectively, without considering what you have already invested.

 

2. Another common trap is confirmation bias, which is when people seek out information that confirms their existing beliefs while ignoring information that contradicts those beliefs. This can lead to bad decisions because you are not considering all of the available evidence. To avoid this trap, try to be open-minded and consider all sides of an issue before making a decision.

 

3. Another trap is the status quo bias, which is when people tend to stick with the current situation because it is familiar and comfortable. This can lead to bad decisions because you may not be considering all of the options available to you. To avoid this trap, try to consider all of your options and make a decision based on what is best for you, not just what is familiar.

 

Decision traps can lead leaders astray and cause them to make bad decisions. To avoid being impacted by these traps, leaders need to be aware of their own biases and make an effort to seek out information that challenges their existing beliefs. They also need to be willing to consider new ideas and make changes when necessary.

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