Decision Making

Decision making bias and errors

Individual decision making: Heuristic decision making Bounded rationality Satisficing Escalation of commitment Group decision making: Groupthink Group polarization

Rational decision-making model

offers a step-by-step approach to making decisions that maximize outcomes by examining all available alternatives.

How do groups handle risk

A risky shift is the tendency for groups to make riskier decisions than the average risk initially advocated by their individual members. A conservative shift is the tendency for groups to make less risky decisions than the average risk initially advocated by their individual members. What determines which kind of shift occurs? A key factor appears to be the initial positions of the group members before they discuss the problem. Group discussion seems to polarize or exaggerate the initial position of the group: Somewhat conservative members exhibit a conservative shift when they discuss the problem. Somewhat risky members exhibit a risky shift after discussion. Two main factors explain the occurrence of risky and conservative shifts: Group discussion generates ideas and arguments that individual members have not considered before. Group members try to present themselves as basically similar to other members but "even better." Minimize: Usually use more structured decision making Devil's advocate Nominal Group Technique Delphi method Etc

rational approach steps

A systematic, step-by-step process for making decisions Identify the problem Search for information Develop decision criteria Generate alternatives Evaluate alternatives Choose an alternative Implement the plan Measure, evaluate and adjust accordingly

Dan Ariely

Behavioral economist Dan Ariely, the author of Predictably Irrational, uses classic visual illusions and his own counterintuitive (and sometimes shocking) research findings to show how we're not as rational as we think when we make decisions. DMV Organ donor

Group Polarization

Group polarization: The tendency of group members to shift toward more extreme positions than those they initially held as a result of group discussion. Due to discussion of already favored ideas; individuals tend to express slightly more extreme views than other members during discussion Risky Shift/Conservative Shift are characteristic of this phenomenon

Group Decision Making

Groups should perform better than individuals when: the group members differ in relevant skills and abilities, as long as they do not differ so much that conflict occurs some division of labor can occur memory for facts is an important issue

risks with group decision making

Groupthink Polarization Risky shifts Conservative Shifts

Are we in control of our own decision

People use heuristics People are prone to make irrational decisions External influences can impact our decisions We need to understand our cognitive limitations to help us make better decisions

Programmed Decisions

Programmed decisions are decisions that become somewhat automatic because a person's knowledge allows him or her to recognize and identify a situation and the course of action that needs to be taken. Intuition can be described as emotionally charged judgments that arise through quick, nonconscious, and holistic associations. Intuitive decision making is perhaps never more important than it is during a crisis. A crisis situation is a change—whether sudden or evolving—that results in an urgent problem that must be addressed immediately.

Framing Bias

Prospect Theory If decision is framed in terms of gains: People are RISK AVOIDERS. They protect a smaller gain rather than gamble on a larger gain. If decision is framed in terms of losses: People are RISK TAKERS. They will gamble riskily rather than accept a smaller loss.

Availability Bias

The availability bias is the tendency for people to base their judgments on information that is easier to recall.

Group Think

Unanimous acceptance of decisions is stressed over quality of decisions. Victims of groupthink operate in an atmosphere of unreality that should lead to low-quality decisions. Factors that can cause groupthink include: High group cohesiveness Strong identification with the group Concern for approval from the group Isolation of the group from other sources of information Promotion of a particular decision by the group leader (this appears to be the strongest cause) Symptoms: Illusion of invulnerability Rationalization of problems Illusion of morality Stereotypes of outsiders Pressure for conformity Self-censorship Illusion of unanimity Mind-guards outcomes: Failure to examine risks Selective bias in processing information at hand Failure to look at / reappraise alternatives Failure to work out contingency plans Remedies: Assign & encourage the role of critical evaluator in each group member Leaders should avoid stating preferences & adopt an impartial stance Use multiple groups to work on the same questions Protect security, but seek outside counsel & insight Invite outside experts & have experts challenge the views of core members

Non-Programmed Decison

When a situation arises that is new, complex and not recognized, it calls for a nonprogrammed decision on the part of the employee. As employees move up the corporate ladder, a larger percentage of their decisions become less and less programmed.

Hueristic

When confronted with situations of uncertainty that require a decision on our part, we often use heuristics —simple, efficient, rules of thumb that allow us to make decisions more easily.

Bounded rationality

is the notion that decision makers simply do not have the ability or resources to process all available information and alternatives to make an optimal decision.

Escalation of commitment

refers to the decision to continue to follow a failing course of action. People have a tendency, when presented with a series of decisions, to escalate their commitment to previous decisions, even in the face of obvious failures. Sunk costs are permanent losses of resources incurred as the result of a decision. Throw good resources after bad, acting as if one can recoup sunk costs Sunk costs are permanent losses of resources incurred as the result of a decision. Throw good resources after bad, acting as if one can recoup sunk costs

Satisficing

results when decision makers select the first acceptable alternative considered.