Foundations

Framing Bias

• People make decisions based on how problems or questions are framed rather than the facts

• The way a problem is stated is an anchor

  • ex: the jobs of 6000 workers are threatened with shutdown. Your staff has identified two options to address this crisis.

    • If Plan A is adopted, 4000 jobs will be lost.

    • If Plan A is adopted, 2000 jobs will be saved.

Anchoring Bias

• Our judgment is impacted by the first piece of information we receive

• This info can be random or specifically engineered to anchor you to a disadvantageous point

  • ex: Do you believe that the population of Fiji is more than 1.5 million people?

  • Do you believe that the population of Fiji is less than 500 thousand people?

Visibility Bias

• We notice or have a preference for things spoken about most often or louder. It is more prominent

  • ex: What causes more death in the U.S.

    • Stomach cancer (95,000)

    • Motor vehicle accidents (46,000)

Sunk Costs

• Continuing with endeavors despite the costs outweighing the benefits

• It is difficult to forego failures (sunk costs)

• Can lead to mistakes in decision-making

Systems

• System 1:

  • Based on intuition and emotion can succeed often but is heavily susceptible to the biases

• System 2:

  • Based on rational thinking and analysis

  • The downside is that this shuts down the senses and emotional aspect

  • This system can’t multitask unless you direct the model to do so. Otherwise, it will only do a specific thing

Best Decision

• For important decisions, train system 1 to recognize the need to utilize system 2

Modeling

• Modeling is the logical analysis of organizational problems from an interdisciplinary view, to develop solutions that further the interests of the organization as a whole

• A scientific method of providing executives with a quantitative basis for decisions regarding the operations under their control

Models

• Implicit models:

  • Decision maker’s “view of the world”

• Explicit models:

  • Conceptual

  • Physical

  • Schematic

  • Mathematical

• Analytical models:

  • Involves systems of relationships

    • ex: R = pq

    • C = F + Vq

Challenges with Modeling

• Because the world is such a variable place, we can assess the variability of the profit we maximize through probability analysis and simulation models

• Because the future is uncertain, we assess the decision to enter a new market through decision analysis

• Because real decisions can have many impacts, we assess choices involving multiple factors through multi-criteria decision analysis