dec making 07

Topic: Decision Making : Topic: Decision Making


Decision Making : Decision Making 2 Primary Approaches Classical Decision Theory (CDT) Behavioral Decision Theory (BDT)


Classical Decision Theory (CDT) : Classical Decision Theory (CDT) The “Optimizing” model Problems are carefully defined Alternatives are systematically generated and evaluated Solutions are carefully chosen to optimize outcome


Behavioral Decision Theory : Behavioral Decision Theory The Satisficing Model Bounded Rationality Use obvious choices Confine search to similar solutions Incremental changes Sequential order of comparisons “Satisfice”—choose one that “fits”


BDT Assumptions : BDT Assumptions Individuals have limited cognitive capacity Ability to make rational decisions “bounded” by cognitive limitations


Which is accurate (in describing what we do)? : Which is accurate (in describing what we do)? BDT more than CDT, but . . .


Type of Decision : Type of Decision Programmed (Routine) About 90% of all decisions Non-programmed (Unique) About 10% With Non-programmed QUASI-optimizing Cognitive limitations, but more systematic approach, search, and evaluation


Decision Making: Biases and Heuristics : Decision Making: Biases and Heuristics There’s more going on than just “rational” vs. “nonrational”...


Decision Making Quiz : Decision Making Quiz


Q1: Which of the following causes more deaths in the US each year? : Q1: Which of the following causes more deaths in the US each year? A) pneumonia B) motor vehicle accidents


Decision Making: Biases and Heuristics : Decision Making: Biases and Heuristics Availability:


Q2: Mark is finishing his MBA at a prestigious university. He is very interested in the arts and at one time considered a career as a musician. Is Mark more likely to take a job : Q2: Mark is finishing his MBA at a prestigious university. He is very interested in the arts and at one time considered a career as a musician. Is Mark more likely to take a job A) In the management of the arts? B) With a management consulting firm?


Decision Making: Biases and Heuristics : Decision Making: Biases and Heuristics Representativeness:


Q3: A certain town is served by two hospitals. In the larger hospital about 45 babies are born each day and in the smaller hospital about 15 babies are born each day. As you know, about 50 percent of all babies are boys. However, the exact percentage varies from day to day. Sometimes it may be higher than 50 percent, sometimes lower. For a period of one year, each hospital recorded the days in which more than 60 percent of the babies born were boys. Which hospital do you think recorded more such days?  The larger hospital?  The smaller hospital?   About the same? (that is, within 5 percent of each other) : Q3: A certain town is served by two hospitals. In the larger hospital about 45 babies are born each day and in the smaller hospital about 15 babies are born each day. As you know, about 50 percent of all babies are boys. However, the exact percentage varies from day to day. Sometimes it may be higher than 50 percent, sometimes lower. For a period of one year, each hospital recorded the days in which more than 60 percent of the babies born were boys. Which hospital do you think recorded more such days? The larger hospital? The smaller hospital?   About the same? (that is, within 5 percent of each other)


Q5: The North Face, a mountaineering equipment manufacturer, recently hired a former Olympic cross-country skier to test its products. What is your team’s (average) estimate for salary?  : Q5: The North Face, a mountaineering equipment manufacturer, recently hired a former Olympic cross-country skier to test its products. What is your team’s (average) estimate for salary? $25,000 $40,000 $60,000 $125,000 $150,000 $175,000


Slide16 : Q5: The North Face, a mountaineering equipment manufacturer, recently hired a former Olympic cross-country skier to test its products. What is your team’s (average) estimate for salary? 200 180 160 140 120 100 80 60 40 20 0 T1 T4 T3 T6 T2 T5


Decision Making: Biases and Heuristics : Decision Making: Biases and Heuristics Anchoring and adjustment:


Q5 Which of the following appears most likely? Which appears second most likely?  : Q5 Which of the following appears most likely? Which appears second most likely? Drawing a red marble from a bag containing 50 percent red marbles and 50 percent white marbles. Drawing a red marble seven times in succession, with replacement (a selected marble is put back into the bag before the next marble is selected), from a bag containing 90 percent red marbles and 10 percent white marbles. Drawing at least one red marble in seven tries, with replacement, from a bag containing 10 percent red marbles and 90 percent white marbles.


Conjunctive and Disjunctive events : Conjunctive and Disjunctive events


Listed below are 10 uncertain quantities. For each, write down your best estimate. Next, put a lower and upper bound around your estimate so that you are 98% confident that your range surrounds the actual quantity : Listed below are 10 uncertain quantities. For each, write down your best estimate. Next, put a lower and upper bound around your estimate so that you are 98% confident that your range surrounds the actual quantity a. b. c. d. e. f. g. h. i. j.


To reiterate: Biases and heuristics : To reiterate: Biases and heuristics Availability Representativeness Anchoring and adjustment


Wait, but there’s more! : Wait, but there’s more! The confirmation trap Hindsight bias


Slide23 : Card 1 Prediction: Favorable Report Card 2 Prediction: Unfavorable Report Card 3 Outcome: Rise in the market Card 4 Outcome: Fall in the market


Hindsight : Hindsight How likely was it that the Indianapolis Colts would beat the spread in the Super Bowl?


What to do about heuristics and biases? : What to do about heuristics and biases? Overall, heuristics are useful! But . . . Not always. The key is to recognize: That they exist (and they are our default!) That they affect our decision process When it’s appropriate and inappropriate to use them How to “overcome” them—e.g., actively seek more complete information


How can you improve decision making? : How can you improve decision making? Acquire experience and expertise De-bias judgments Recognize possibility of bias Recognize the direction of the bias Seek feedback Training in decision making Learn to adjust intuitive estimates Expert systems


Attributes of a quality decision process : Attributes of a quality decision process Consideration of multiple alternatives Identification and discussion of merits and underlying assumptions (watch out for biases) Specifying desired outcomes prior to considering alternatives Debate and substantive conflict Perceptions of fairness; participation