Unformatted text preview: Class 17: Individual DecisionMaking MGTS 3401 Cummings Choice 1
The best student in my MBA class 6 years ago writes poetry and is rather shy and small in stature. What was the student’s undergraduate major? A: Chinese studies B: Psychology MGTS 3401 Cummings Choice 2
Which of the following causes more deaths in the United States each year? A: Vehicle accidents B: Stomach cancer MGTS 3401 Cummings Choice 3 Which would you choose? A: a sure gain of $250 B: a 25% chance of winning $1,000 and a 75% chance of winning nothing. MGTS 3401 Cummings Choice 4
Which would you choose? A: a sure loss of $750 B: a 75% chance of losing $1,000 and a 25% chance of losing nothing. MGTS 3401 Cummings Choice 5
Which would you choose? A: a sure loss of $3,000 B: an 80% chance of losing $4,000 and a 20% chance of losing nothing. MGTS 3401 Cummings Definitions: Decisions and DecisionMaking
► Decision: The choices made from among two or more alternatives. MGTS 3401 Cummings Common Biases and Errors
► Availability Bias
► Recent ► Vivid Using information that is most readily at hand. ► Representative Bias “Mixing apples with oranges” Assessing the likelihood of an occurrence by trying to match it with a distinctive preexisting category MGTS 3401 Cummings Common Biases and Errors
► Overconfidence Bias ► Anchoring Bias ► Confirmation Bias ► Availability Bias ► Winner’s Curse ► Representative Bias ► Escalation of Commitment ► Randomness Error ► Hindsight Bias MGTS 3401 Cummings Decisions in DecisionMaking Process DecisionMaking
Decision Step 1 Recognizing discrepancy Step 2 Identifying Weighting Criteria Step 3 Generating Evaluating the alternatives Step 4 Choosing an alternative Step 5 Implementing the chosen alternative Step 6 Monitoring and maintaining the solution Prblem Solving MGTS 3401 Cummings Definitions: Decision Making
► Decision: ► Decision making: The choices made from among two or more alternatives. The process of defining a problem; identifying and weighting criteria; developing, improving and evaluating alternatives; and from these, choosing a course of action.
MGTS 3401 Cummings DecisionMaking Processes
► Rational Objective rationality: ►the notion that decision makers are completely informed of all alternatives and their probabilities and consequences, are infinitely sensitive, and therefore they will make decisions based on fact and rational thought. MGTS 3401 Cummings Assumptions of the Rational DecisionMaking Process
Rational DecisionMaking Model Describes how individuals should behave in order to maximize some outcome. Model Assumptions • Problem clarity • Known options • Clear preferences • Constant preferences • No time or cost constraints • Maximum payoff
MGTS 3401 Cummings Rational DecisionMaking
► Objective facts, economically motivated ► All alternatives, all possible consequences Expected Utility or Expected Value MGTS 3401 Cummings Common Biases and Errors
► Overconfidence Bias ► Anchoring Bias ► Confirmation Bias ► Availability Bias ► Winner’s Curse ► Representative Bias ► Escalation of Commitment ► Randomness Error ► Hindsight Bias ► Prospect Theory; risk when seeking gain versus when avoiding loss
MGTS 3401 Cummings How Are Decisions Actually Made in Organizations?
Bounded Rationality
Individuals make decisions by constructing simplified models that extract the essential features from problems without capturing all their complexity. They cannot be aware of all alternatives, consequences and probabilities, and therefore will make “satisficing” decisions by choosing the first satisfactory solution that they identify.
MGTS 3401 Cummings What heuristic (perception shortcut) does this sound like Bounded Rationality uses? The tendency to organize perceptual stimuli so that, together, they form a complete message. MGTS 3401 Cummings For Today For Today
So, what, then, is “bounded rationality”? ►How and why is it different from the “rational” model? ►How does it affect an individual’s decisionmaking? ►How and why is it different from “intuitive” decision making? MGTS 3401 Cummings What Type of Decision?
► Programmed decision ► Nonprogrammed decision Routines (predetermined courses of action) employed to deal with frequently occurring situations. The process of addressing unique or novel situations confronting the organization.
MGTS 3401 Cummings Two Other Approaches to Decision Making often actually Used
► Muddling through ► “Garbage can” approach Using an incremental approach to decision making by making small adjustments to the status quo over longer periods of time. Managers haphazardly mix problems, solutions, alternatives, and participants together in hopes that they will connect on some level.
MGTS 3401 Cummings For Today For Today Define each of the “Common Biases and Errors” in individual decisionmaking. How, in particular, are the availability bias, the representative bias, and escalation of commitment error, different from each other? How is the confirmation bias different from the overconfidence bias? What steps might you realistically take in your own decisionmaking, to prevent these biases?
MGTS 3401 Cummings Steps in DecisionMaking
1. 2. 3. 4. 5. 6. Define the problem. Identify the decision criteria. Allocate weights to the criteria. Develop the alternatives. Evaluate the alternatives. Select the best alternative. MGTS 3401 Cummings Steps in DecisionMaking
1. 2. 3. Define the problem. Identify importance and type of decision. Identify the decision criteria. Satisfice? Optimize? Allocate weights to the criteria. Also Probabilities o f various outcomes Estimate them? Expected Value? Develop the alternatives. Use creativity. Check for full information. Evaluate the alternatives. Biases? Select the best alternative.
MGTS 3401 Cummings 4. 5. 6. Decisions and DecisionMaking as Part of ProblemSolving
DecisionMaking
Decision Step 1 Recognizing discrepancy Step 2 Identifying Weighting Criteria Step 3 Generating Evaluating the alternatives Step 4 Choosing an alternative Step 5 Implementing the chosen alternative Step 6 Monitoring and maintaining the solution Problem Solving MGTS 3401 Cummings For Monday For Monday
► Read Chapter 8 ► Prepare FNT Questions MGTS 3401 Cummings ...
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 Fall '09
 Bhowmick
 Game Theory, MGTS

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