Decision-Making Flashcards

Decision-Making

What is Decision Making?

• Decision making is the process of developing a commitment to a course of action or choice.
  • It involves:
    • Choice
    • Process
    • Commitment
• It's also the process of problem-solving, where a problem is the gap between the current state and the desired state.

Well-Structured Problem

• A well-structured problem is one where the existing state, desired state, and how to get from one state to the other are clear
• Outcome: clear/obvious
• May have past experience with the problem or standardized methods to solve it.

Ill-Structured Problem

• An ill-structured problem is one where the existing state, desired state, and how to get from one state to the other are unclear or unknown.
• Outcome: unpredictable
• Complex and has a high degree of uncertainty.

Rational vs. Intuitive Decisions

System 1

• Fast
• Unconscious
• Automatic
• Used for everyday tasks
• Error prone

System 2

• Slow
• Conscious
• Effortful
• Used for complex issues
• More accurate

Rational Decision-Making

• How decisions 'should' be made.
• Process of choosing a course of action out of a number of different alternatives.
• Aims to make consistent, value-maximizing choices within specified constraints.
  • Assumes complete information.
  • Identifies all relevant options in an unbiased way.
  • Chooses the option with the highest quality.

Rational Decision Model

1. Define the problem.
2. Identify the criteria.
3. Allocate weights to the criteria.
4. Develop alternatives.
5. Evaluate the alternatives.
6. Select the best alternative.

Is ‘Rational’ Decision Making Realistic?

• The question of whether rational decision-making models reflect how we actually make decisions is posed
• Many management theories are based on economics, which treats economic agents as opportunistic
• Evidence suggests that this is not the case because there are too many assumptions with the model

Rational Model Assumptions

• Problem clarity:
  • The problem is clear and unambiguous
• Known options:
  • The decision-maker can identify all relevant criteria and viable alternatives
• Clear preferences:
  • The criteria and alternatives can be ranked and weighted
• Constant preferences:
  • Specific decision criteria are constant and the weights assigned to them are stable over time
• No time or cost constraints:
  • Full information is available because there are no time or cost constraints
• Maximum payoff:
  • The chosen alternative will yield the highest perceived value

Actual Decision-Making

• Bounded Rationality
• Satisficing
• Intuition
• Judgment shortcuts

Bounded Rationality

• Perfect rationality:
  • A decision strategy that is completely informed, perfectly logical, and oriented toward economic gain
• Bounded rationality:
  • Limitations on a person’s ability to interpret, process, and act on information
  • Limitations include:
    • Political constraints
    • Resource constraints (information, time, money)
    • Ourselves

Satisficing vs. Maximizing

• Satisficing:
  • Accepts 'good enough'.
  • Doesn't obsess over other options.
  • Can move on after making a decision.
  • Happier with outcomes.
• Maximizing:
  • Exhaustively seeks the best.
  • Compares decisions with others.
  • Expends more time and energy.
  • Unhappier with outcomes.

Perception

• The process by which individuals select, organize, and interpret their impressions to give meaning to their environment.
• Your brain’s filter – what info gets in and what doesn’t

Why Perception Matters

• Employment interviews – first impressions are powerful
• Performance expectations – expectations become reality
• Performance evaluations – typically subjective

Perceptual Error

• Perception takes time and effort, so we often take perceptual shortcuts
• We can only take in certain stimuli
• Selective perception

Attribution Theory

• When we observe behavior, we attempt to determine whether the cause is:
  • Internal
  • External

Determinants of Attribution

• Distinctiveness – if the person displays different behaviors in different situations.
• Consensus – if everyone who faces a similar situation responds in the same way.
• Consistency – if the person responds the same way over time to the same situation.

Attribution Chart

• Observation of individual behavior leads to interpretation of cause (internal or external).
• Distinctiveness:
  • High distinctiveness leads to external attribution.
  • Low distinctiveness leads to internal attribution.
• Consensus:
  • High consensus leads to external attribution.
  • Low consensus leads to internal attribution.
• Consistency:
  • High consistency leads to internal attribution.
  • Low consistency leads to external attribution.

Self-Serving Bias

• When we are successful, we focus on internal factors.
• When we fail, we blame external factors.

Fundamental Attribution Error

• In others, we tend to underestimate the external factors and overestimate internal factors.
• Especially when others are unfamiliar and their behavior is negative.

Attribution Bias Summary

• Self:
  • Success: Internal
  • Failure: External
  • Bias: Self-serving bias
• Other:
  • Success: External
  • Failure: Internal
  • Bias: Fundamental attribution error

Halo Effect

• Drawing a general impression about an individual based on a single characteristic, such as intelligence, likeability, or appearance.

Contrast Effect

• A person’s evaluation is affected by comparisons with other individuals recently encountered.
• Strong/weak competition will make you seem better/worse.

Intuition

• Non-conscious process created from experiences
  • Quick decisions
  • Past experiences
  • Holistic associations
  • Affectively charged – engaging the emotions

Heuristics & Cognitive Biases

• Mental shortcuts
• Heavy reliance on everyday lives
• Efficient but not always accurate à Systematic and predictable errors or cognitive biases

Overconfidence Bias

• Believing too much in our own ability to make good decisions – especially when outside of own expertise.
• The weaker the ability, the more likely to overestimate performance/ability.

Dunning-Kruger Effect

• Low-ability individuals think they are better than they are
• You need a certain level of skill/knowledge in an activity to realize how truly bad you are.

Confirmation Bias

• Selecting and using only facts that support our decision.
• Examples in:
  • Journalism
  • Hiring/promotion
  • Science

Availability Bias

• Emphasizing information that is most readily at hand (recent & vivid).
• Risk of death examples:
  • Airplane crashes: 1/11 million
  • Shark attack: 1/3.7 million
  • Car crashes: 1/500

Retrievability Bias

Note: There was no content in the transcript for the heading 'Retrievability Bias.'

Hindsight Bias

• Tendency to believe we could accurately predict the outcome, after the outcome of the event is known.
• Reduces our ability to learn from the past.

Planning Fallacy

• The tendency of people to underestimate the duration of time to complete a specific task or project.
• When we predict our own tasks, we tend to show an optimistic bias (underestimating time).
• When others predict task completion time, they show a pessimistic bias (overestimating time).
• Potential explanations:
  • Not taking our experience into consideration
  • Wishful thinking
  • Self-serving bias
  • Framing

Prospect Theory

• A theory that describes the ways in which people make decisions based on the potential value of losses and gains rather than the final outcome.

Risk Aversion

• The tendency to prefer a sure gain over a risker outcome.
• People prefer to take chances to prevent a negative outcome.

Framing

• Presenting one of two equivalent value outcomes either in positive or gain terms (positive framing) or in negative or loss terms (negative framing).
• The starting point of individuals’ decisions is contained by the ways in which information is presented to them.

Sunk Cost Fallacy

• Continue to rationalize decisions, actions, and investments in an existing cost despite increasingly negative outcomes.
• A cost that has already been paid and thus cannot be recovered.
• Sunk costs are permanent losses of resources incurred as the result of a decision.

Escalation of Commitment

• Escalation of commitment is repeating or further investing in an apparently bad decision.
• Causes of escalation:
  • Self-justification effect
  • Self-enhancement effect
  • Prospect theory effect
  • Sunk costs effect

Emotions and Making Choices

• Emotions form preferences before conscious evaluation.
• Moods and emotions affect the decision process.
• Emotions serve as information in decisions.

Emotions Affect Decision-Making

• Affective states can affect the decision-making process:
  • Positive Affect
    • Prompts more creative thinking and greater cognitive flexibility
    • Irrational optimism (similar to overconfidence)
  • Negative Affect
    • Anger induces more rigid thinking and quicker decision-making
    • Sadness reduces cognitive flexibility BUT reduces overconfidence

Kahneman et al., 2011 - Before You Make That Big Decision

1. Is there any reason to suspect motivated errors, or errors driven by the self-interest of the recommending team? (self-interested biases)
2. Has the team fallen in love with its proposal? (affect heuristic)
3. Were there dissenting opinions within the team? (group think)
4. Could the diagnosis be overly influenced by an analogy to a memorable success? (saliency bias)
5. Are credible alternatives included along with the recommendation (confirmation bias)
6. If you had to make this decision again in a year’s time, what information would you want, and can you get more of it now? (availability bias)
7. Do you know where the numbers came from? (anchoring bias)
8. Is the team assuming that a person, organization, or approach that is successful in one area will be just as successful in another (halo effect)
9. Are the recommenders overly attached to a history of past decisions (sunk cost)