An Overlooked Human Bias in
Organizational Decision Making
Abstract
Petroleum engineering studies in the last 40 years have experimented with and simulated earth systems, such as petroleum reservoirs. Research has centered on rock and fluid properties, production mechanisms and processes. These studies utilized mathematics and pure and applied science. The present study also conducts experiments in the petroleum discipline, focusing instead on the behavior of decision-makers in the presence of uncertainty. Economics, cognitive and behavioral psychology are the sciences employed in this research.
Work in psychology, risk and experimental economics has demonstrated that preferences can change or even reverse depending on the way a problem is presented. The term "framing" is used to indicate the fact that simple and unspectacular changes in the wording of decision problems can lead to preference reversals. Individuals tend to be more willing to accept risk when they perceive something as a potential loss and tend to avoid risk when they perceive having something to gain. Concepts of framing bias and preference reversal were introduced by Tversky and Kahneman (1979). This present research is a first attempt at applying and extending the theoretical and empirical concepts of framing to decision making in oil and gas.Understanding these frames and how they occur can lead to methods that would help reduce or eliminate these biases in risky decision making when multi-million dollar oilfield investments are being undertaken.
To gain insight into whether framing biases exist in oil and gas decision making, a series of cognitive experiments were designed and tested in this domain using an empirically based approach. Questions were designed using frame manipulation techniques and contained four case scenarios with common themes expressed in oil and gas situations. The subjects were current U.S. oil and gas and service company managers in the reservoir exploration and production disciplines. In addition, a control group that comprised petroleum engineering and other geoscience students from twelve petroleum engineering schools across the U.S. was included.
Results demonstrated that three types of framing could exist in oil and gas decision making. These include: point of reference framing using a gamble and an environmental spill decision; word framing using a drilling decision; and psychological framing using an exploration investment with real options. The point of reference framing resulted in strong preference reversals on the part of respondents, with risk seeking in the case of negatively worded problems and risk aversion in the case of positively worded problems. These preference reversals were in all cases as large as those found in the Tversky and Kahneman (1979) experiments. There was no significant difference in this bias effect between professional expert and layperson. The drilling reasoning with word framing, however, showed significant differences in framing response in the positive frame between layperson and industry professional. Also, the results showed that viewing a decision in different frames does influence the way oil industry managers make judgments.
These findings are significant because managers in oil and gas company ranks make hundreds
of risky decisions on a daily basis. Framing distorts the true nature of the uncertainty
in these decisions and leads to irrational choice. The fact that framing does occur when very
large capital investments are being considered means that presentations before management
and the decisions that are subsequently made should be reviewed for the frames expressed.
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