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Summary - Judgment in managerial decision making
1 Introduction to Managerial Decision Making
(1) work on the right problem (2) specify your objectives (3) create imaginative alternatives (4) understand the consequences (5) grapple with your tradeoffs (6) clarify your uncertainties (7) think hard about your risk tolerance (8) consider linked decisions
1.1 The Anatomy of Deciscion
Decision making process:
- Gathering information: identify the problem, and the criteria, generate alternatives
- Action (make the decision)
- Implementation of the decision
To what refers the term Judgment?
To the cognitive aspects of the decion making process
Which steps should you take when applying a "rational" decision making process?
1 define the problem; 2 identify the criteria; 3 weight the criteria; 4 generate the alternatives; 5 rate eacht alternative on each criterion; 6 compute the optimal decision
Decision Making Process
1. Define the problem-> Your goal should be to solve the problem, not just eliminate its temporary symptoms.
2. Identify the criteria-> Most decision acquire you to accomplish more than one objective.
3. Weight the criteria-> Different criteria will vary in importance
4. Generate alternatives-> an optimal search continues only until the cost of the search outweighs the value of the added information
5. Rate each alternative on each criterion-> How well will each of the alternative solutions achieve each of the defined criteria?
6. Compute the optimal decision
1.2 System 1 and System 2 Thinking
System 1 thinking
Refers to our intuitive system, which is typically fast, automatic, effortless, implicit and emotional
By what system are most decisions made?
System 1 thinking
Refers to reasoning that is slower, conscious, effortful, ecplicit, and logical
In most situations, System 1 thinking is sufficient
but System 2 logic should preferably influence our most important decisions
the busier and more rushed people are, the more they have on their minds, and the more likely they are to rely on System 1 thinking
1.2.1 Bias 3: Insensitivity to Base rates
Bias 3: Insensivity to base rates (Нечувствительность к базовой оценке)?
People make decision by basing on the descriptions and details, but ingore a main base or information
Down Syndrome example
1.2.2 Bias 4: Insensitivity to Sample size
Bias 4: Insesnsitivity to Sample size (Не чусвтвительность к оценке размера) ?
People forget to pay attention size of sample.
e.g. 4 of 5 dentists
1.2.3 Bias 5: Misconceptions of Chance
Bias 5: Misconception of Chance (заблуждение)?
When people are wrong about what can happened, 50 %
Sperma exapmle. 50% that it will be a girl or a boy
1.2.4 Bias 6: Regression to the mean
Bias 6: Regression to the mean (Регрессия к среднему)?
Expectations; If you do something good, there is no guaranty that you will do the same result again.
e.g. football team
Summary - Judgment in Managerial Decision Making
1 Introduction to Managerial Decision Making
- Define the problem
- Identify the criteria
- Weight the criteria
- Generate alternatives
- Rate each alternatie on each criterion
- Compute the optimal decision
System 1 thinking
Most decisions are made by system 1 thinking. The busier and more rushed people are, the more likely they are to rely on System 1 thinking
System 2 thinking
system 2 logic should preferably influence our most important decisions
what is optimal decision making?
how are decisions actually made>
We satisfice: rather than examining all possible alternatives, we simply search until we find a satisfactory solution that will suffice because it achieves an acceptable level of performance
The availability heuristic
People assess the frequency, probability, or likely causes of an event by the degree to which instances or occurences of that event are readily "available"in the memory.
the representative heuristic
assessing the likelihood of A by the degree to which A is representative of B, that is, resembles B
Positive hypothesis testing
we intuitively use selective data when testing hypotheses
the affect heuristic
most of our judgments are evoked by an affective, or emotional, evaluation that occurs even before any higher-level reasoning takes place
Assumptions of economic theory
- Complete information about the choice alternatives
- calculation of utility of combinations
- individualism, self-interest
- knowledge about short-term and long-term utility
- stable preferences
- maximisation of optimisation of utility
- no role for emotion
A decision is defined as amoment in an ongoing process of evaluting alternatives for meeting an objective, at which expectations about a particular course of action impel the decision maker to select that course of action most likely to result in attaining the objective
- the cognitive part of decision making
- a judgment requires a choice to become a decision
problem solving - may or may not require action
- one moment in a larger process
- when alternatives are evaluated
- leading to the selection of one alternative
- aimed at a specific goal
- eventually leading to action
outcomes are expressed in objective units
2 Common Biases
- ease of recall (based on vividness and recency)
- retrievability (based on memory structures)
- Insensitivity to base rates
- insensitivity to sample size
- misconceptions of chance
- regression to the mean
- conjunction fallacy
- the confirmation trap
- conjunctive- and disjunctive-events bias
- hindsight and the curse of knowledge
ease of recall
individuals judge events that are more easily recalled from memory, based on vividness or recency, to be more numerous than events of equal frequency whose instances are less easily recalled
individuals are biased in their assessments of the frequency of events based on how their memory structures affect the search process
insensitivity to base rates
when assessing the likelihood of events, individuals tend to ignore base rates if any other descriptive information is provided - even if it is irrelevant
insensitivity to sample size
when assessing the reliability of sample information, individuals frequently fail to appreciate the role of sample size
misconceptions of chance
individuals expect that a sequence of data generated by a random process will look "random", even when the sequence is too short for those expectations to be statistically valid
regression to the mean
individuals tend to ignore the fact that extreme events tend to regress to the mean on subsequent trials
individuals falsely judge that conjunctions (two events co-occurring) are more probable than a more global set of occurrences of which the conjunctions is a subset
individuals tend to seek confirmatory information for what they think is true and fail to search for disconfirmatory evidence
individuals make estimates for values based upon an initial value (derived from past events, random assignment, or whatever information is available) and typically make insufficient adjustments from that anchor when establishing a final value
conjunctive- and disjunctive-events bias
individuals exhibit a bias toward overestimating the probability of conjunctive events and underestimating the probability of disjunctive events
individuals tend to be overconfident of the infallibility of their judgments when answering moderately to extremely difficult questions
hindsight and the curse of knowledge
after finding out whether or not an event occurred, individuals tend to overestimate the degree to which they would have predicted the correct outcome. Furthermore, individuals fail to ignore information they possess that other do not when predicting other's behavior
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Tendency for people to define what is fair in ways that favour themselves
We view all gains and losses in the future to be worth less than they would be in the present.
Any choice that involves a tradeoff between current and future benefits should discount the future to some extent.
People demand far more money to sell their product than the amount they would be willing to pay for another one's same product.
It describes the value you place on a commodity
It refers to the quality of the deal that you receive, evaluated in reference to "what the item should cost".
A reduction of the probability of an outcome has more importance when the outcome was initially certain than when it was merely probable
The more we get of something, the less pleasure it provides us
The spotlight effect is the tendency of an individual to overestimate the extent to which others are paying attention to the individual's appearance and behavior.
- People are not trying to falsify, eventhough this is necessary.
- Overestimating their judgment
- People do not use all the information they got