MGT 302 Week 1 - Behavioral Decision Making

Decision Making Science: Prescriptive versus Descriptive

• Prescriptive-what people should do (rational). Also known as System 2 thinking (Kahneman) 

• Descriptive what people really do (bounded rationality). Often called Behavioral Decision Making. Also known as System1 thinking (Kahneman).  

Prescriptive/ Rational Approach  

• Define the problem 

 • Identify the criteria 

 • Weight the criteria 

 • Generate alternatives  

• Rate each alternative on each criterion 

 • Compute the optimal decision 

Behavioral / Descriptive Approach

• What do people really do?  

• They rely on heuristics – People rely on a number of simplifying strategies, or rules of thumb, in making decisions. These short cuts, or rules of thumb, are called heuristics (Kahneman and Tversky) 

 • These heuristics lead to systematic biases  

• Descriptive Message: Be aware of the biases and seek to avoid their traps 

Decision Making Biases

• Confirmation Bias  

• Prospect Theory 

 • Egocentrism  

• Availability Bias  

• Anchoring