2.5 Decision Making

Normative Decision Making

How people should make decisions according to optimal frameworks

Cognitive/Information Processing Approach

Focus on biases and heuristics that reflect limitations of human attention

• What are the causes of non-optimal decisions?

Naturalistic and Dynamic Decision Making

How people make decisions in natural environments (real life)

• Expertise and its influence on decisions

• Complex environments and evidence leading to decisions

Uncertainty

• Unknowns about the outcome of the decision

• Risk – potential for unpleasant consequences

Judgement

• Classification or assessment about a certain property

• “this applicant will succeed”

Decision

• Choice between actions

• “we will admit this applicant”

Three Stage Decision Model

Perceive relevant information → Situation Assessment → Decision Choice

Four Stage Decision Model

Perceive relevant information → Situation Assessment → Decision Choice → Monitor and Correct

Cue diagnostic value (Perception and Selective Attention)

how much evidence a cue offers regarding a hypothesis

Cue reliability (Perception and Selective Attention)

likelihood that the cue can be believed

Saliency Bias (Perception and Selective Attention)

Salient cues capture attention even if they are not relevant or diagnostic

As-if heuristic (Perception and Selective Attention)

treating all cues as if they are of equal value

cognitive biases

Uncertainty = ___

Heuristics

mental shortcuts or rules of thumb for inferring what is

• Effort-conserving short cuts that are usually correct, but less accurate than full effort determinations

Biases

systematic distortion of a decision outcome

What is anchoring bias?

A bias where a person relies too heavily on the first piece of information (the "anchor") when making decisions.

probability

Humans are bad at calibrating to the ___ of rare events

black swan event

A rare, unpredictable event with massive consequences.

planning fallacy

we don’t think something is going to take as long as it will

negative event

If a ______ is not in our memory, we underestimate its probability

expected value is lower than it really is

positive event

We overestimate a _____ probability

Enter the lottery more than we should

Direct retrieval

“this decision worked last time, so it will work this time”

• Similar scenarios or contexts necessary

Loss aversion

Losing a value is worse than gaining that value

• Maximizing expected utility is important, but not losing is more important

ex. it hurts more to lose $10 than the excitement to gain $10

cognitive misers

Biases and heuristics exist because decision making is effortful (humans are lazy)

default bias

We tend to stay with the default option 

ex. organ donation in the US vs other countries

parole is most likely given in the beginning of the day because they will take the time to review your case rather than at the end where people get lazy

Compensatory strategy (decision choice)

Rank order importance of attributes

• Assess value of objects on each attribute

• Assess the sum of the products of values and attributes per object

• Choose the highest sum object

Elimination by aspects

• Eliminate options as they fail to meet the most important criteria

Satisficing

making a decision by saying: “good enough”

Expected value as the gold standard

Make the decision that produces the maximum value most times

the outcome that is going to be the best the most often

Hindsight bias

Good outcomes produced by good decisions

waiting to see what happens to say if it was a good decision or not

Sometimes “luck” because of the unpredictability of the world

Good decision produces a bad outcome: bad luck

Bad decision ”lucks out” and produces a good outcome

Why Do Decisions Go “Wrong”

Gambling is almost always a bad decision

• Can sometimes be a result of biases/heuristics

“Bad” decisions typically fail to maximize the expected value of the outcome

Safety behaviors

• Framing consequences to make them more salient or available ex. if you don’t do this, something terrible is going to happen (an accident counter)

• Risk mitigation should focus on reducing the cost of compliance (use of harnesses in construction)

Nudges

Subtle, low-cost means to alter decision behavior

ex. default bias (organ donors; turnitin before you submit an assignment)

ex. Sludges: prevent people from doing something (making it hard for someone to change their default settings)