Decision Making Chapter 6 Student

8/16/2019 Decision Making Chapter 6 Student

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Announcement

March 21 (Monday) Decision Making

– Reading assignment Chapter 6 (191-208)

March 23 (Wednesday) Team Dynamics 1

– Reading Assignment: Chapter 9

– In-class Group Decision Making exercise

– Be sure to arrive at class on time

To reward students to come to class on time, beginning from March 23, we will

run a PRS question at the beginning of the class

Two sample final reports have been uploaded to the course website under

“files” for your reference

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Midterm Exam Grade Distribution

Class average 55/72 (76.5%)

Standard deviation 8

Highest score 71 (98.6%)

Lowest score 30 (41.67%)

Please feel free to schedule meetings with Queenie and/or me to review

your individual exam results

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Mid-semester Feedback

Teaching – More videos, experiments, interactive activities, activities between students,

funny elements…

Others

– More chance to get participation cards

– Exam---detailed review session, sample questions, cheat sheet, essay

– More guidance on group projects

– Cut down on readings from the book (information overload, too much memorization)

– Upload ppt earlier – Leave some discussion time with teammates

3/20/201


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Regarding “Participation” Grade

Class participation (14%)

– In-class Discussion (cards) (5%)

– In-class Experiential Exercises (2.5%)

• MBTI exercise, emotional labor exercise, library article search exercise…

– PRS throughout the semester (2.5%)

– Attendance (required on presentation days) (4%)

– Good citizenship/ Misbehaviors…


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Final Exam Format

60% Essay questions; 40% MC questions

Will allow to bring one A4-size paper as “cheat” sheet

Provide more sample exam questions; more detailed review session; cut

down on readings

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Individual Decision Making

Professor Larry Farh

March 21, 2016

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Learning Objectives

Understand how individuals make decisions

Contrast the rational model with behavioral model (bounded rationality) ofdecision making

Describe common decision biases or errors

Toward effective decision making strategies

6-7 7


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Decision Making

Conscious process of making

choices among one or more

alternatives with the intention

of moving toward some desiredstate of affairs

How many decisions did you make

this morning?Are you good at making decisions?

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Two Models of Decision Making

Model 1. Rational Decision Making Model (also called classical model,

rational choice model)

– How people should make decisions

Model 2. Bounded Rationality (also called behavioral model)

– How people actually make decisions

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Rational Model: Six Steps

1. Completely define the problem

2. Identify complete set of decision

criteria

3. Allocate objective weights to criteria

4. Develop complete set of alternatives

5. Evaluate alternatives simultaneously

6. Select best alternative

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Identify and

Define Problem

Develop

Alternatives

A1

A2

A3

A4

An

Evaluate

Alternatives

+

A1 A1

A2 A2

An AnWeight

the Criteria

Set Decision

Criteria (e.g., ROI,

Staff retention)

Make Optimal

Decision

Rational Model of Decision Making

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Application of the Rational ModelWhich candidate should we pick?

Criteria, Weights, & Ratings (scores out of 10)

Options Research Service TeachingWeighted

total

Weights 40% 20% 40% 100%

Candidate 1 4 10 4 5.2




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Rational Model: Steps & Assumptions

STEPS

1. Completely define the problem

2. Identify complete set of decision

criteria3. Allocate objective weights to criteria

4. Develop complete set of

alternatives

5. Evaluate alternativessimultaneously

6. Select best alternative

ASSUMPTIONS

1. Clear problem, all information known

2. All criteria, options & consequences

known

3. Criteria & options can be ranked &

weighted

4. Criteria, options & weights constant

over time5. No time or cost constraints to make

decision

6. Choice will maximize outcome

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Why?

• Limited information-processing capability -- impossible to assimilate and

understand all the information necessary to optimize

• Have to reduce a complex problem to a level at which it can be readily

understood and solved

Bounded rationality

• Making decisions by adopting simplified models that extract the essential

features from problems without capturing all their complexity and seeking

solutions that are satisfactory and sufficient (satisficing)

6-14

Behavioral Model of DM

(Bounded Rationality)

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A Model of Bounded Rationality

Ascertain

the Need

for a Decision

Simplify

the Problem

Select

Criteria

Identify a

Limited Set

of Alternatives

Compare

Alternatives

Sequentially

Expand

Search for

Alternatives

Select the

First “Good

Enough” Choice

A “Satisficing”

Alternative

Exists

YesNo

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How Decisions Are Actually Made

Herbert Simon, Nobel Prize-winning scholar, 1957


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Simplify the problem

Search for criteria and alternatives

• Based on “easy to find”, “highly visible”, “familiar criteria”, “previouslytried-and-true solutions”, “easily justified”, “implicit favorite”

• A limited list of the more conspicuous alternatives is identified

Review the list, looking for a solution that is “good enough”(satisficing)

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How Does Bounded Rationality Work?


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Problems in Human Decision Making

why do we make bad decisions

1. Faults in problem identification

2. Faults in information intake (e.g., reconstructive memory)

3. Paralyzed by choices

4. Asymmetry in making risky decisions

5. Common decision heuristics and biases (errors)

6. Escalation of Commitment


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Problem Identification Process

Problems and opportunities are not well-labeled or pre-defined

– Problems: gap between “what is expected” and “what it is”

– Opportunity: gap between “what it is” and “what it could be”

– Need to interpret ambiguous information

When Albert Einstein was asked how he would save theworld in one hour, he replied that the first 55 minutes

should be spent defining the problem and the last fiveminutes solving it.

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1. Faults in Problem Identification

Influenced from stakeholders’ framing of the situation

May miss opportunities that differ from our mental models

Look decisive to short circuit problem identification

Falsely define problems in terms of solutions

Filter out negative information

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Identifying Problems more Effectively

Be aware of perceptual and diagnostic limitations

Understand the limitations of our mental models

Discuss the situation with others, seeing different perspectives

Resist the temptation to look decisive

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2. Faults in Information Input

Misinformation effect (reconstructive memory)

– Incorporating “misinformation” into one’s memory of the event

– E. g., after witnessing an event and retrieving misleading information about it

Video about eyewitnesses…

http://www.youtube.com/watch?v=rSzPn9rsPcY

“Memory isn’t like reading a book: it’s more like writing

a book from fragmentary notes.” John F. Kihlstrom, 1994

http://www.youtube.com/watch?v=rSzPn9rsPcYhttp://www.youtube.com/watch?v=rSzPn9rsPcY


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3. Paralyzed by Choice

Decision makers are less likely tomake any decision at all as the

number of options increases

(e.g., jam-tasting booths; 6 types—30%;

24 types—3%)

Occurs even when there are clear

benefits to selecting any

alternative (e.g., pension funds)

Making the best choice among

many alternatives can be

cognitively and emotionally

draining

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4. Asymmetry in Making Risky Decisions

When a decision is framed as a gain, people are more likely risk

averse. When a decision is framed as a loss, people are more likely

risk prone.

Not necessarily a “good” or “bad” thing, but it is important to

recognize the asymmetry of human choices. How a problem is framed

(as gain versus loss) will influence people’s decisions.

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Prospect Theory

A

B

A

B

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A natural tendency to feel

more dissatisfaction from

losing a particular amount

than satisfaction fromgaining an equal amount

+10000

-10000-25000

+25000


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5. Decision Heuristics and Biases

– What is “heuristics”?

• Unstructured and often non-conscious mental “shortcut” for judgment

and decision making

• Usually adaptive, but not 100% accurate

Assumptions

• People are generally “lazy” in cognitive processing

• People mainly rely on “heuristics” even when there is sufficient mental

resources


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PRS Question #3

Which of the following causes more

deaths in the United States each year:

A. Colon cancer

B. Motor vehicle accidents


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Decision Making Heuristics and Biases

Availability

Confirmation bias

Anchoring

Overconfidence

Representativeness

Overestimate the accuracy

of our judgment

Over reliance on initial

information

Seek out information

that confirms our views

Over reliance on readily

available information

Over reliance onresemblance to

expected pattern


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Availability Heuristics

– The tendency to judge the likelihood of things in terms of their

availability in memory. If instances of something come readily to

mind, we presume it to be commonplace.

• Examples

– “Some people” are more afraid of flying than driving (because

airplane crashes are vivid and memorable)

– More recent events, emotional events…

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Confirmation Bias

The tendency to seek and rely on information that will confirm what we

already believe, and to avoid data that will contradict our pre-existing views.

We see what we want (or expect) to see.

Examples:

– In job interview

• Interviewers tend to seek impression-congruent information during interviews

– In a study on interview…

• Interviewers give more opportunity for applicants with good impression; sit

closer and act more friendly

• BUT ask more difficult questions for applicants with poor impression; sit

farther and act less friendly

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Anchoring Effect

Tendency to rely too heavily on

the first piece of information

offered (the "anchor")

In other words, initial data or

reference points have too muchinfluence on the final estimates

or choices that we make

Why? The first thing we read we think is true, and then we fail to adjust

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Overconfidence Effect

The overconfidence effect is a well-established bias in which a person's

subjective confidence in his or her judgments is reliably greater than the

objective accuracy of those judgments, especially when confidence is

relatively high.

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Representativeness Heuristic

Estimate probabilities of events by how much they resemble (are

representative of) other events (e.g. stereotypes) rather than on their

objective probability information

Over reliance on resemblance to expected patterns and ignore base rates

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6. Escalation of Commitment

The tendency to repeat an apparently bad decision or allocate more

resources to a failing course of action

Four main causes of escalation

– Self-justification—to protect your face, ego…

– Prospect theory effect—make risky decisions when facing losses

– Perceptual blinders—blind to negative information

– Closing costs—unable to absorb closing costs

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Evaluating Decisions More Effectively

Separate decision choosers from evaluators

Establish a preset level to abandon the project

Find sources of systematic and clear feedback

Involve several people in the evaluation process

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Role of Emotions in Decision Making

Emotions form preferences before we consciously evaluate choices

Moods and emotions influence how we process information

– “Negative mood” pay more attention to details

– “Anger” more optimistic about risky alternatives

We ‘listen in’ on our emotions and use that information to make choices

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Summary Points (1)

Which decision making model is the best? Apply rational model process within bounded rationality

Sometimes a fast-and-frugal process of solving problems is the best option

( bounded rationality)

Intuition is most valid when you have relevant past experience

Choose strategies to match problems

Consider the importance of the decisions and the costs/benefits of search

and processing

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Summary Points (2)

Making complex decision requires

– Attention to inputs (what information we take into account)

– Attention to process (how we put that information together to

arrive at an outcome)

Use problem solving techniques and advice to avoid biases

– Be mindful of and overcome biases

We are all human beings

– Limited capacities for confronting complex worlds

– Pay attention to the quality of data and sources

– Don’t waste time on programmable (unimportant) decisions

Documents

Decision Making Chapter 6 Student