Decision Making 1

Decision making (definition)

Making choices among alternative courses of action—including inaction. In organizations, decisions affect other people and can change the course of the organization.

How many decisions do humans make per day (estimate)

~35,000 conscious + unconscious decisions per day (estimate from the slides).

Why decision making matters in management

Management can be seen as largely decision making: leaders and employees at all levels must decide, and those choices shape outcomes for others and the organization.

Decision-making models (3)

Rational model, Intuitive model, and Bounded rationality model.

Rational decision-making model (what it is)

A step-by-step approach used when the goal is to maximize outcomes and make the "best" choice.

Rational model advantage: decision criteria

Forces you to establish decision criteria (parameters you will use to evaluate options).

Rational model advantage #2

generate alternatives. Encourages generating multiple alternatives/solutions rather than jumping to the first idea.

Rational model assumptions (big idea)

Assumes people fully understand the decision, know all available choices, have no biases, and want to make the optimal decision.

Why the rational model is hard to use day-to-day

Real life has time limits, too much information, too many choices, and human bias—leading to analysis paralysis.

Analysis paralysis

When having too much information/too many options slows or prevents making a decision.

Intuitive decision-making model (what it is)

Arriving at a decision without conscious reasoning—often fast, based on experience/gut sense.

When intuitive decision making is common

When there are time pressures, constraints, uncertainty, or rapidly changing conditions that make a fully rational process difficult.

The intuitive model considers

one option at a time; once a workable solution is found, it's put into motion.

System 1 (brain + style)

Limbic system; operates automatically, quickly, effortlessly; not under conscious control; produces snap judgments and practiced routines.

System 1 examples

Running from a wild animal; driving home the same way for years (automatic routine).

System 2 (brain + style)

Prefrontal cortex; requires conscious attention, control, and concentration; handles effortful, complex thinking and looking for non-obvious cues.

System 2 examples

Doing calculations; learning to drive for the first time (effortful attention).

Why having System 1 + System 2 helped humans

Evolutionary advantage: we can do complex thinking (System 2) without losing quick gut reactions (System 1).

System 1 & 2 conflict (key issue)

System 2 doesn't always realize when System 1 is driving; we often think we're being more rational/data-driven than we really are.

Bounded rationality model (what it is)

A model recognizing limits of the decision-making process (limited time, info, cognitive capacity).

Satisficing

In the bounded rationality model: Choosing the first acceptable alternative—what is "good enough"—after narrowing options to a manageable set.

Why satisficing happens

It saves cognitive time and effort by accepting a choice that meets a minimum threshold instead of searching for the true optimum. (bounded rationality model)

Heuristics (definition)

Mental shortcuts/rules of thumb people use to make decisions quickly.

Cognitive bias (definition)

are errors in perception that leads to faulty decision making.

Overreliance on heuristics can lead to predictable cognitive biases

What is availability bias?

Judging events as more likely because examples/information come to mind easily or are frequently encountered.

What does bias refer to in the context of decision-making?

A tendency for people to over- or under-estimate the true parameter.

Why availability bias happens

People conflate likelihood with how often they're exposed to information; vivid/emotional events are especially 'available' in memory.

Availability bias example from class

People often misjudge frequencies (e.g., the 'K' letter exercise: there are about 3× as many words with 'k' as the 1st letter vs 3rd letter).

Representativeness bias (definition)

Assessing likelihood based on stereotypes or how much something 'resembles' a typical case, rather than base rates.

Conjunction fallacy (linked to representativeness)

Mistakenly believing a combination of events (A and B) is more likely than a single event (A alone).

Representativeness example from class

'Kendall' scenario: salesperson is more likely than 'salesperson and activist' (because conjunctions are always less or equally probable).

Anchoring & adjustment bias (definition)

Relying too heavily on an initial number (anchor) and failing to adjust sufficiently, even if the anchor is arbitrary/irrelevant.

Why anchoring is powerful

People struggle with absolute judgments; better at sensing relative terms

Anchoring example from class

Starting salary estimates shifted depending on whether the initial guess was a low anchor ($40k) vs high anchor ($100k).

Framing bias (definition)

tendency to be influenced by how a choice/problem is presented (gain vs loss frame), even when underlying outcomes are equivalent.

Loss aversion (why framing works)

Losses feel more painful than equal gains feel good; this emotional asymmetry pushes choices. Example: Negative emotion of being let out

of class 5 minutes late exceeds the

positive emotion of being let out of class 5

minutes early

Framing → risk behavior

When framed as losses, people tend to take more risk to avoid the pain of a loss; when framed as gains, people often prefer certainty.

Framing example from class (gain vs loss)

Receiving $2,000 then choosing between a risky option vs guaranteed smaller change feels different depending on whether it's framed as keeping more vs giving back.

Confirmation bias (definition)

Processing information in ways that support existing beliefs; we see what we want to see and avoid disconfirming evidence.

Why confirmation bias happens

People are ego-affirming: it feels better to be 'right' than to challenge core beliefs; we don't actively seek contrary evidence.

remedies to biases

• Awareness and Training

• Check yourself and try to think from a third-person perspective

• Expand your information search and play devil's advocate