Chapter 1
System 1 thinking
our intuitive system, which is typically fast, automatic, effortless, implicit, and emotional - make most of life decisions using this system
Why is availability good for managers and decision-making?
our minds generally recall instances of events of greater frequency easier than rare events
Pro's and cons of representativeness
pro: offers a good first-cut approximation...drawing attention to the best option con: can work on an unconscious level
System 2 thinking
reasonings that is slower, conscious, effortful, explicit, and logical
What do people rely on when making decisions?
simplifying strategies, or rules of thumb
Heuristics
simplifying strategies, or rules of thumb...serve as a mechanism for coping with the complex environment surrounding our decisions
Confirmation Heuristics: Anchoring
some irrelevant initial hypothesis or starting point holds undue sway over our judgments
Availability Heuristic characteristics
- event that is vivid, imagined, specific will be more available ex: good for managerial decision-making - this heuristic is fallible
Representativeness Heuristics characteristics
- managers also use this - they may predict a person's performance based on an established category of people that the individual represents for them ex: if a manager thinks the best salespeople will be white athletes, he will favor them
Four general heuristics
1. availability heuristics 2. the representativeness heuristic 3. the confirmation heuristic 4. the affect heuristic
Decision-making process: Steps
1. define the problem 2. identify the criteria 3. weigh the criteria 4. generate alternatives 5. rate each alternative on each criterion 6. compute the optimal solutions
Defining the problem: managers often err by....
1. defining the problem in terms of proposed solution 2. missing a bigger problem 3. diagnosing problem in terms of its symptoms
Approach to Decisions: two types of people
1. maximizers = exhaustively seeking the best 2. satisficers = accept good enough
Field of decision making: two parts
1. prescriptive models studied 2. study of descriptive models
Why would a prescriptive approach lead to an optimal decision?
1. understanding our own decision making processes helps to clarify where we are likely to make mistakes 2. optimal decision in a given situation depends on the behavior of others 3. good advice is given in making decisions, but people do not follow it b/c they do no understand how they actually make decisions
How is human judgment bounded?
1. willpower is bounded - we tend to give greater weight to present concerns than to future concerns 2. our self-interest is bounded - we care about the outcomes of others
What deviates from rationality?
Human judgment
Trusting their intuitions...which system is being used?
System one
What limits the quantity and quality of available information?
Time and cost constraints
The rational model is based on...
a set of assumptions that prescribe how a decision should be made rather than describing how a decision is made
What do heuristics provide time-pressured managers and other professionals?
a simple way of dealing with a complex world
The Affect Heuristic
most of our judgments follow an affective or emotional evaluation that occurs even before any higher-level reasoning takes place...people use affective evaluations as the basis of their decisions rather than engaging in more complex analysis - used when people are busy or under time constraints
Satisficers
accept good enough, don't obsess over other options, can move on after deciding, happier with outcomes
Usable memory
allows decision makers to retain only a small amount of info
Why do heuristics create problems?
because people rely on them and are unaware of doing so...therefore we are prone to misapplying heuristics to inappropriate situations
How can we better understand decisions?
by describing and explaining actual decisions
Maximizers
compare decisions, expand more time and energy, unhappier with outcome, seek the BEST
What can positive hypothesis testing trigger in confirmation heuristics?
confirmation bias, anchoring, hindsight bias
What do scenarios have in common in the decision making process?
each one has a problem, and there are a number of alternative solutions
System 1 thinking is... System 2 thinking is used for...
effortless most important decisions
Descriptive decision researchers consider...
how decisions are actually made
In the decision-making process, what does not everyone do?
identifies exactly six steps...some separate them more or less
Satisfice
instead of examining all possible alternatives, we simply search until we find a satisfactory solution that will suffice because it is good enough
What constrains the ability of decision makers to accurately "calculate" the optimal choice assumed by the rational model?
intelligence limitations and perceptual errors
What limits the ability of decision makers to accurately calculate the optimal choice from the universe of available alternatives?
intelligence limitations and perceptual errors
Prescriptive decision analysts develop methods for making...
optimal decisions
Decision-making process: Define the problem
step number 1....accurate judgment is required to identify and define the problem -goal should be to solve the problem, not eliminate its temporary symptoms
Decision-making process: Identify the criteria
step number 2....identify ALL relevant criteria in the decision-making process (require you to accomplish more than one objective)
Decision-making process: Weight the criteria
step number 3....different criteria will vary in importance value may be specified in dollars, points, or whatever scoring systems makes sense
Decision-making process: Generate alternatives
step number 4....identify possible courses of action optimal search continues only until the cost of the search outweighs the value of added info
Decision-making process: Rate each alternative on each criterion
step number 5...often the most difficult stage b/c it requires us to forecast future events
Decision-making process: Compute the optimal decision
step number 6...this step consists of 1. multiple the ratings in step five by the weight of each criterion 2. ading up the weighted ratings across all of the criteria for each alternative 3. choosing the solution with the highest sum of weighted ratings
What are the two schools of thought?
study of prescriptive models and the study of descriptive models
When are errors and biases most likely to occur?
system 1
What system do we use to make most decisions?
system 1 automatically, unconsciously, sufficient
People are rushed, busier, and have more on their minds...which system is likely being used?
system one
Prescriptive vs. descriptive
tell us what we should do tell us what we actually do
What is "criteria" in the decison-making process?
the attributes of the problem of what we care about
Judgment
the cognitive aspects of our decision-making process
To understand judgment, what must we understand first?
the decision-making process
Rationality
the decision-making process that is logically expected to lead to the optimal result, given an accurate assessment of the decision maker's values and risk preferences
Confirmation Heuristics
there are always at least four separate situations to consider when assessing the association between two events, assuming each one just has two possible outcomes...everyday decision making neglects this fact -intuitively use selective data when testing hypotheses
Confirmation Heuristics: Confirmation bias
we search for and interpret evidence in a way that supports the conclusions we favored at the outset
Confirmation Heuristics: Hindsight bias
we too quickly dismiss the possibility that things could have turned out differently than they did
Representativeness Heuristics
when making a judgment about an individual, people tend to look for trains the individual may have that correspond with previously formed stereotypes
Availability Heuristics
when people assess the frequency, probability, or likely causes of an event by the degree to which instances or occurrence of that event are "available" in memory
Why do you have a decision to make?
when you have alternatives