Lecture 13 Mangerial decison making

# Lecture 13 Mangerial decison making - Managerial Decision...

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Unformatted text preview: Managerial Decision Making Suppose that you are a doctor. You order a routine screening test for a rare but serious disease. On average 0.01% of the population has this disease. You judge the patient to be no more or less likely to have this disease than the general population. The false negative rate for the test is zero, that is, the test never gives a negative answer when a patient does have the disease. The false positive rate is 1%, that is, for people who do not have the disease the test will return a positive answer 1% of the time. The test result is positive—that is, the test diagnoses the patient has having the disease. What is the probability that the patient has the disease? You are the Doctor Probability patient has disease • A) over 99% • B) over 90% • C) over 50% • D) less than 50% • E) less than 1% 3 Probability patient has disease • A) over 99% • B) over 90% • C) over 50% • D) less than 50% • E) less than 1% 3 Concrete Example • 10,000 people • Of 9,999 without disease, 100 test positive. • The one person with disease tests positive. ⇒ 1 person out of the 101 who test positive has the disease. • You see four cards below. On one side of each card there is a letter; on the other side of each card there is a number. • Rule: If an odd number appears on one side of a card, then a vowel must appear on the opposite side of the card. • Question : Which cards do you need to turn over to determine if the rule is being violated? E 7 F 4 Rule: If an odd number appears on one side of a card, then a vowel must appear on the opposite side of the card. Question : Which cards do you need to turn over to determine if the rule is being violated? A) only 7 B) 7 & E C) 7 & 4 D) 7 & F E) All four cards. E 7 F 4 Timid Choices and Bold Forecasts: A Cognitive Perspective on Risk Taking Kahneman and Lovallo, 1993, Management Science • Rational model: – business decisions are choices among gambles with financial outcomes; – managers properly update probability beliefs (Bayes rule); – managers maximize expected utility. Timid Choices...
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## This note was uploaded on 09/11/2011 for the course UGBA 103 taught by Professor Berk during the Spring '07 term at Berkeley.

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Lecture 13 Mangerial decison making - Managerial Decision...

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