9.17 Individual Decision Making

9.17 Individual Decision Making - Individual Decision...

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Click to edit Master subtitle style Individual Decision Making September 17, 2007
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Decision Making l Process of making choices from among several alternatives. l Objectives l How do individual decisions depart from a rational model? l What are the sources of error in personal decisions? l How can these errors be avoided?
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Rational Economic Model l Decision makers consider all possible alternatives before selecting the optimal solution. l By “optimal” we mean the decision that leads to the greatest well being for the individual decision maker.
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Limitations of the Rational Model l Bounded Rationality : People lack the cognitive skills required to formulate and solve highly complex business problems in a completely objective, rational way. l Leads to a satisficing decision : Decision made by selecting the first minimally acceptable alternatives as it becomes available. l Example : Dating every eligible person until we find the perfect fit versus dating until we meet the first minimally acceptable person.
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How Do People Actually Make Decisions? l Heuristics : Simple decision rules used to make quick decisions about complex problems. l “Rules of thumb” l Heuristics can be useful when processing large amounts of information. l E.g. admissions decisions.
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