# Week8da - Spring 2010 DecisionAnalysis MS405 Decision Making Heuristics Kemal Kl Faculty of Engineering and Natural Sciences Kemal Kl Sabanc

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Kemal Kılıç, Sabancı Üniversitesi Kemal Kılıç, Sabancı Üniversitesi Spring Spring 2010 2010 Decision Analysis   MS 405    Decision Making Heuristics Kemal Kılıç Faculty of Engineering and Natural Sciences 1 Week 7

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Kemal Kılıç, Sabancı Üniversitesi Kemal Kılıç, Sabancı Üniversitesi Spring Spring 2010 2010 Three Approaches of Decision Analysis Descriptive: How decisions are made (by ordinary folks) Normative: How decisions should be made (by super rational people) Prescriptive: How decisions could be made better (perhaps by coaching) It is a prescriptive approach designed for normally intelligent people who want to think hard and systematically about some important real problems. (Keeney and Raiffa, 1976) 2 Week 7
Kemal Kılıç, Sabancı Üniversitesi Kemal Kılıç, Sabancı Üniversitesi Spring Spring 2010 2010 Decision Making Heuristics and Bias People use the following heuristics commonly intuitively and unconsciously in order to simplify their decision making Representativeness Insensitivity to prior probabilities (Conjunction Fallacy) Based on small sample size (Base Rate Fallacy) Tend to forget exceptions Availability Anchoring and Adjustment Framing 3 Week 7

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Kemal Kılıç, Sabancı Üniversitesi Kemal Kılıç, Sabancı Üniversitesi Spring Spring 2010 2010 Representativeness People tend to make decisions based on their stereotypes. That is to say; for a class they have a prototypical member which they believe represents the class, say the class center When they judge a new concept they compare it with the class centers, and make decisions based on these similarities (proximity to class centers) 4 Week 7
Kemal Kılıç, Sabancı Üniversitesi Kemal Kılıç, Sabancı Üniversitesi Spring Spring 2010 2010 Representativeness – Examples Example: HTHT is more representative than HHHH of a sequence of random coin flips, but is no more likely than HHHH. What is more likely in a lottery: a. 4 - 7 - 13 - 19 - 47 - 63 b. 1 - 2 - 3 - 4 - 5 - 6 5 Week 7

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Kemal Kılıç, Sabancı Üniversitesi Kemal Kılıç, Sabancı Üniversitesi Spring Spring 2010 2010 Representativeness – Examples 6 Week 7
Kemal Kılıç, Sabancı Üniversitesi Kemal Kılıç, Sabancı Üniversitesi Spring Spring 2010 2010 “Suppose Bjorn Borg reaches the Wimbledon finals in 1981. Please rank order the following outcomes from most to least likely:” 1. Borg will win the match 2. Borg will lose the first set 3. Borg will lose the first set but win the match 4. Borg will win the first set but lose the match 7 Week 7

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Kemal Kılıç, Sabancı Üniversitesi Kemal Kılıç, Sabancı Üniversitesi Spring Spring 2010 2010 “Suppose Bjorn Borg reaches the Wimbledon finals in 1981. Please rank order the following outcomes from most to least likely:” 1. Borg will win the match 2. Borg will lose the first set
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## This note was uploaded on 12/19/2011 for the course ECON Econ203 taught by Professor Majdabpadawnan during the Spring '11 term at University of Maribor.

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Week8da - Spring 2010 DecisionAnalysis MS405 Decision Making Heuristics Kemal Kl Faculty of Engineering and Natural Sciences Kemal Kl Sabanc

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