MGMT 230 - 1 Decision Making

Heuristic Definition:
- A heuristic is a mental shortcut or a rule of thumb that simplifies decision-making processes.
- Contrast with Algorithms:
- Algorithms are exhaustive, step-by-step procedures that guarantee a correct solution but require significant time and mental effort.
- Relying on Heuristics:
- Our minds often rely on heuristics due to their efficiency and effectiveness in everyday situations.

System 1 Thinking:
- Coined by Daniel Kahneman, who won the Nobel Prize in Economics.
- Refers to fast, automatic, and intuitive thinking processes.
Importance of System 1:
- Though successful at solving problems in natural environments, this system is not without its errors.
- Errors arise not from bugs or flaws, but from systematic noise in decision making.

Even Number and Color Test:
- Goal: Test if an even number indicates a blue opposite face.
- Cards: 3 (Red), 8 (Blue)
- Correct Response: Turn over the 8 card (to confirm blue) and the red card (to confirm rejects red).
Age and Alcohol Drinking Test:
- Goal: Test if drinking alcohol requires being over 18.
- Options: Age cards with 16 (under 18) and a card showing 'drinking beer'.
- Correct Response: Turn over 16 and 'drinking beer' to confirm violations of the rule.

Developed by evolutionary psychologists Leda Cosmides and John Tooby (1992).
Key Insights:
- Human reasoning may be governed by modules aimed at solving specific problems in social interactions.
- Presents insights that humans excel at context-specific reasoning tasks, especially around social relations.

Historical Context:
- During WWII, U.S. analysts plotted bullet holes to determine where to add armor on planes.
- Abraham Wald’s Insight:
- Noticing that only returning planes were analyzed omitted data on those that did not survive.
- Recognized Survivorship Bias: Judging the effectiveness of decisions based on visible instances without considering unseen failures.

Organ Donation Models:
- Different registration types (opt-in vs. opt-out) show varying participation rates.
- Opt-in: Individuals must check a box to participate.
- Opt-out: Individuals will participate by default unless they check the box to decline.
- The default effect significantly increases the likelihood of participation.

Study Data:
- Participation rates for employees hired under different automatic enrollment structures.
- Illustrates that default options lead to higher levels of engagement among employees.

Study by Tversky & Kahneman (1974):
- Participants spun a wheel for a random number (anchor) before estimating percentages of African countries in the UN.
- Illustrates how initial information can skew judgment, regardless of relevance.

Definition:
- The tendency to judge the probability of events based on how easily examples come to mind.
Impact on Decision Making:
- Individuals often overestimate the likelihood of events (e.g., deaths due to war or nuclear accidents) based on vividness of instances they remember.

Misjudgments about probabilities due to ignoring relevant base rates.
Example of a candidate assumed to be a strong leader based on resume credentials despite lacking evidence for related skills.

Availability Heuristic vs. Representativeness Heuristic:
- Availability Heuristic: Relies on recall ability to estimate probability.
- Representativeness Heuristic: Estimating probability based on how closely an instance resembles a known category.
Example of Misjudgments:
- Overestimating employee misconduct based on recent headlines (availability) vs. assuming competence based on stereotypes (representativeness).

Concept Overview:
- People often fail to understand the implications of exponential growth.
Example:
- A pond with lilypads doubling in number each day; while half-covered on day 25, it reaches total coverage the next day.
- Mistake in Intuition:
- People misjudge growth as linear rather than exponential, despite real-world examples demonstrating the consequences.

Fat-Tailed Distributions:
- Most pandemics produce fewer than 1,000 deaths, yet outliers can result in catastrophic thresholds, leading to public misconceptions.
- Examples from historical pandemics show significant over- or underestimation of risk due to these distributions.

Decision Factors:
- Evaluates choices in scenarios involving risk, such as gaining $900 for sure vs. a 90% chance of gaining $1,000.
- Loss Aversion:
- Losses impact emotions more profoundly than equivalent gains, driving risk-averse behavior in economic decisions.

The emotional experiences are greatly influenced by the peak (intensity) and the endpoint of an experience, often neglecting its overall duration.

A misconception that past events affect the probabilities of future independent events, leading to miscalculations in investment or gaming strategies.

The phenomenon where ownership increases perceived value of an item, leading individuals to favor what they own, often irrationally.

Continuing on an unfavorable course of action due to prior investments rather than potential future outcomes; encourages investment based on previous losses.

Defining Characteristics:
- Maximizers: Seek the best possible outcome in every decision and often experience less satisfaction.
- Satisficers: Opt for good enough outcomes and generally experience greater contentment.
- Example of Decision Strategies:
- A maximizer delays hiring for the ideal candidate while a satisficer makes timely hires based on adequate qualifications.

Key Concepts Addressed:
- Survivorship bias, default effect, heuristics (anchoring, availability), exponential growth bias, normal versus fat-tailed distributions, prospect theory and associated biases, peak-end rule, gambler's fallacy, endowment effect, sunk cost fallacy, maximizers versus satisficers.