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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
Candidate 2 10 4 4 6.4
Candidate 3 4 6 10 6.8
Candidate 4 6 6 6 6.0
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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)
6-16
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