Chapter 02 – Introduction to Behavioral Analysis
CHAPTER 2
Introduction to Behavioral Analysis
1. The Behavioral Pitfalls box on page 36, which discusses the actions of Scott McNealy
included the following passage.
On March 8, 2001, Cisco announced that because the downturn looked like it would
2. The situations are similar. During the late 1990s, both Sun and Merck were highly
profitable firms whose market values were well in excess of their book values. The assets of
both firms had large components that were intangible, residing in research and development.
6. The Behavioral Pitfalls box discussing Merck includes the following passage:
Surprisingly, Merck’s post-approval study appeared to show that Vioxx actually caused
heart attacks and strokes. However, the firm’s executives resisted that interpretation and
invested heavily in promoting the drug.
The chapter text also contains the following passage:
Researchers at Stanford University, Harvard University, and the Cleveland Clinic wrote
Both of the above passages suggest that executives at Merck underweighted information that
$ millions Jun-95 Jun-96 Jun-97 Jun-98 Jun-99 Jun-00 Jun-01 Jun-02 Jun-03 Jun-04 Jun-05 Jun-06 Jun-07 Jun-08 Jun-09
Income Before Extraordinary Items 355.8 476.4 762.4 762.9 1,031.3 1,854.0 981.0 -587.0 -3,429.0 -388.0 -107.0 –864.0 473.0 403.0 -2,234.0
Sale of Common and Preferred Stock 122.4 114.4 134.3 165.6 258.3 346.0 422.0 237.0 182.0 239.0 218.0 249.0 389.0 177.0 51.0
Purchase of Common and Preferred Stock 36.1 522.3 456.1 284.4 358.4 631.0 1,321.0 591.0 499.0 . . . 428.0 2,764.0 130.0
Cash and Cash Equivalents – Change -20.1 115.0 131.3 162.1 266.7 748.0 -377.0 552.0 -9.0 126.0 –90.0 1,518.0 51.0 -1,348.0 -396.0
Number of Shares Outstanding 98,514 185,982 370,486 381,262 780,553 1,597,000 3,248,000 3,246,270 3,229,645 3,326,072 3,410,000 3,505,000 3,602,000 752,000 753,364
Chapter 02 – Introduction to Behavioral Analysis
1 – the cumulative binomial probability associated with 19 heart attacks
9. If the editors’ judgment reflected a behavioral bias, it would be bias stemming from
availability. In this respect, the editors did not raise questions about the incidence of heart
attacks in patients who took Vioxx but were not at low risk of a heart attack.
As for agency conflicts, the authors of the article had either received consulting contracts
Chapter 02 – Introduction to Behavioral Analysis
7
Minicase
Case Analysis Questions
1. There are at least five important phenomena involved in the minicase, although a case can
be made for at least seven. Real world cases are often complex, and unlike psychological
experiments that seek to isolate single phenomena, feature several phenomena in ways that
can be challenging to sort out.
Availability bias: Excessive reliance on information which is readily available. Earthquake
magnitude of the 1960 Chilean tsunami.
Confirmation bias: Downplaying, if not ignoring, information that disconfirms views held,
and relative to information that confirms views held. TEPCO ignored lessons associated with
Chapter 02 – Introduction to Behavioral Analysis
8
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reproduction or further distribution permitted without the prior written consent of McGraw–Hill Education.
the incident that took place at Blayais, France, involving risks from a storm surge. In
addition, the minicase states that “both Japanese executives and regulators noted the presence
of a general Japanese cultural bias against openly discussing worst case scenarios. Prior to
the Fukushima Daiichi meltdown, there was little interest in public discussion or media
coverage about tsunami safety.”
Overconfidence, Excessive Optimism, and Illusion of Control: Overconfidence in knowledge
features establishing confidence intervals that are excessively narrow. Excessive optimism is
attaching subjective probabilities that are too low for unfavorable events and too high for
favorable events. The minicase states that TEPCO was faulted for having taken a series of
prudent precautions to protect against damage from storm surges, let alone a severe tsunami.
The minicase also states the following: “The Carnegie report communicates the views of
some Japanese experts who stated that the accident at Fukushima Daiichi serves to illustrate
“supreme overconfidence by decision makers that Japan’s nuclear power program would
never suffer a severe accident.” Given the definition of excessive optimism, this last
statement illustrates excessive optimism as well as overconfidence. Notably, one of the major
9
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reproduction or further distribution permitted without the prior written consent of McGraw–Hill Education.
expensive permafrost ice wall that some characterized as a “Hail Mary play,” meaning an
action with a lottery-like feature involving only a low probability of a very successful
outcome, but a high probability of failure. This behavior pattern is consistent with the
fourfold pattern with risk seeking in the domain of losses.
Although probabilistic assessments are no panacea, given what we know about
2. The binomial formula in Excel to solve the first part of this problem is
=1-BINOM.DIST(2,15,000,0.0001,1). Here BINOM.DIST(2,15,000,0.0001,1) is the
probability of 2 or fewer events (core meltdowns) in 15,000 reactor years when the
10
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reproduction or further distribution permitted without the prior written consent of McGraw–Hill Education.