Decision Making Final Exam Study guide

d.Prisoner dilemma game

A price war between two companies that sell the same product is analogous to what theoretical game? a.Monty Hall game b.Ultimatum game c.Multiparty ultimatum game d.Prisoner dilemma game

False

Succumbing to heuristics is inevitable, and there is no way to make judgment less prone to them. Rather, one can only be aware of the biasing effect heuristics have on one's judgment. True or False

The self

Sadness has been found to focus one's attention to [x1].

False

In a negotiation, the party with the better alternatives is more likely to hold out and wait for the other side to make the first offer. True or false

c. giving away information is giving away power

Negotiators often are reluctant to give away information because they assume that: a. their information is too important. b. it will anchor their final outcome. c. giving away information is giving away power. d. if the other side does not ask questions, then their willingness to share information is equally low.

d. sharing information between the parties

Trust enables value creation through: a. creating contingent contracts. b. identifying the parties' interests. c. facilitating tradeoffs between issues of different relative importance. d. sharing information between the parties.

A present decision that is likely to generate further losses.

Which of the following is not likely to produce escalation of commitment?

Making the best decision for the organization means that the manager should focus on future costs and benefits. However, organizations value consistency. Thus, while the good of the organization demands ignoring previous commitments and choosing the course of action that best meets the organization's present and future needs, the manager will more likely be rewarded for escalating commitment than for changing course. The manager faces a conflict between what the organization wants and what the organization needs.

Explain the paradox that a manager faces, when choosing between changing course of action and escalating commitment to i

a. decrease in the magnitude of self-serving biases

When different parties to a social dilemma openly discuss the issues, this causes: a. decrease in the magnitude of self-serving biases. b. escalation of conflict. c. a decrease in the effect of the affect heuristic. d. a decrease in the width of the positive bargaining zone.

It is hard to recognize the reasons for including sunk costs in our calculations in the first place.

Why is it so hard for managers to internalize the sunk-cost concept when making decisions

All of the above

A department manager has personally decided to hire a new employee. This employee's performance, however, proves to be below expectations. Nevertheless, the manager decides to keep the employee, explaining away his current performance as merely part of the learning process. This escalation of commitment may be due to: Perceptual biases. Judgmental biases. Impression management. All of the above

Full protection against Hepatitis B and Hepatitis C.

A drug company has developed a vaccine that protects against Hepatitis C and Hepatitis B, but not against Hepatitis A. Which of the following is the recommended way to present this new pill? 67% protection from all types of Hepatitis. Protects you from 2 out of 3 types of Hepatitis. Full protection against Hepatitis B and Hepatitis C. Leaves you at only 33% risk of Hepatitis.

A reference price.

A product's transactional utility is contingent upon: The product's acquisition utility. A reference price. The level of risk associated with the product. All of the above.

2. Bid lower than what they think the book is worth, to avoid the winner's curse.

A publisher wants to bid for the rights to publish a celebrity's memoir. The publisher would be better off to: 1. Bid higher than what they think the book is worth, to avoid the winner's curse. 2. Bid lower than what they think the book is worth, to avoid the winner's curse. 3. Enter the bid early, in order to reduce uncertainty. 4. Enter the bid late, in order to reduce uncertainty.

What the asset is currently worth on the market.

A rational valuation of an asset is based on: What the asset is currently worth on the market. The time that had passed since purchasing the asset, including depreciation. What the asset cost at the time it was purchased. The transaction utility of the purchase.

True

A search for alternatives may be too short to find the best possible alternative, but still be considered rational and optimal. True or False

To propose that the bill would come into effect in the future, not immediately.

A senator wants to pass a bill to implement a substantial increase in the tax on gasoline. Which feature is most likely to help the bill's chances of being passed? To frame the bill in terms of potential gains, instead of potential losses. To emphasize that people today do not do enough to reduce gas consumption, so as to tap other senator's self-worth. To propose that the bill would come into effect in the future, not immediately. To emphasize the fairness of the bill, so as to tap other's senators fairness perceptions.

b.fail to consider the impact of their decisions on others outside the organization.

An example of bounded awareness in negotiations is when negotiators: a. assume that what worked in one context will not work in another, even when the contexts are familiar. b.fail to consider the impact of their decisions on others outside the organization. c. fail to realize that a publicly known deadline affects them just as much as the other party, and think they are put at an asymmetric advantage. d.all of the above.

d. all of the above

An extreme offer made by one side: a. increases the likelihood of a better deal for the side that makes the offer. b. increases the likelihood of reaching an impasse. c. will have less influence if the other side has a good sense of the bargaining zone. d. all of the above.

False

An investor should avoid buying a diversified portfolio of stocks, since it may lead to excessive spending. True or False

c. as long as the cost of the search does not outweigh the value of the added information.

An optimal search for alternatives should last: a. as long as needed to find the best solution. b. as long as needed to find the first good enough solution. c. as long as the cost of the search does not outweigh the value of the added information. c. as long as the cost of the search is within the appropriate limits set by the decision maker.

False

Because they are risk-averse, negotiators in final-offer arbitrations tend to believe that the chance of their final offers to be accepted is lower than it actually is. True or False

False

Bounded ethicality has replaced the assumption of conscious choice as the best explanation for unethical behavior. True or False

All of the above

Businesses that adjust their prices upward in response to high demand, consistent with economic laws of supply and demand, can experience which of the following outcomes: 1. Underperform other businesses that consider the norms of fairness. 2. Are punished by customers who are more sensitive to fairness than to economic rationality. 3. Make larger profit than businesses that comply with norms of fairness. 4. All of the above

False

Cognitive neuroscience research has refuted the "multiple-selves" theory, finding that both short-term and long-term gratifications activate the same regions in the brain. True or False

True

Disclosure of conflicts of interest can increase biases stemming from these conflicts. True or False

b.the confirmation trap

Drake is a department manager in a company which has recently decided to hire a new analyst. After interviewing all candidates, Drake recommended the company hire Anne, but senior management preferred to hire Beth. Drake argued that Beth is an inferior choice, but agreed to accept her for a trial period of six months. At the end of the trial period, Drake evaluated Beth's performance as poor. Although this evaluation may have been fair, is it also possible that it was biased by: a.the curse of knowledge. b.the confirmation trap. c.overconfidence. d.misperceptions of chance.

x1: simple, easy x2: difficult, hard

Entrepreneurs often fall prey to self-focus, which makes them too eager to enter [x1] contests and too reluctant to enter [x2] competitions.

b. all players are perfectly rational

Game theory provides the most precise prescriptive advice to negotiators, on the condition that: a. they do not lie. b. all players are perfectly rational. c. they focus on interests, and not on arguments. d. they are aware of their BATNAs.

True

Groups that display lesser unity and consistency of views and beliefs across members are less susceptible to the confirmation trap. True or False

c. The effect of anchors remains strong even for experts.

How do anchors affect judgments of experts in negotiations? a. The effect of anchors is eliminated by expertise. b. The effect of anchors is significantly reduced, but not eliminated. c. The effect of anchors remains strong even for experts. d. The effect of anchors is even stronger for experts than it is for non-experts.

The curse of knowledge is responsible for this phenomenon. People are unable to ignore knowledge they have when assessing others' knowledge. A highly knowledgeable employee takes for granted knowledge that is available to him or her, and therefore may not put enough emphasis on such things as transferring basic knowledge, or explaining jargon, when instructing subordinates and new employees.

In many organizations, the most competent employees are usually poor in tutoring subordinates and new employees. Indicate the bias that is responsible for this phenomenon and explain how this phenomenon occurs.

True

In negotiations, the endowment effect creates a bias primarily in seller's evaluations. True or False

Hold on to stocks that are trading below purchase price.

In order to come out to themselves as "winners" and to avoid becoming "losers", investors tend to:

Our willpower is bounded, such that we tend to give greater weight to present concerns than to future concerns. Our self-interest is bounded, such that we care not only about our own outcomes, but also about the outcomes of others. Our awareness is bounded in a way that makes us overlook obvious, important, and readily available information that lies beyond our immediate attention. Our ethicality is also bounded, or is limited in ways of which we are unaware.

In what ways is our rationality bounded? Discuss the aspects that are bounded in our judgment and how they are bounded.

b. the availability heuristic.

Inner city crime in the U.S. gets considerable media coverage, such that every homicide is reported in the news. In contrast, a story of a person who died from a heart attack rarely makes the news. This leads people to overestimate the frequency of deaths due to homicides relative to those due to heart failure. This best describes: a. the representativeness heuristic. b. the availability heuristic. c. positive hypothesis testing. d.the affect heuristic.

True

Investors' expectations of future performance of mutual funds are negatively correlated with actual returns. True or False

Reference Group Neglect

Japanese automakers started producing innovative new models in the 1980's and introducing them in the United States. General Motors did not see its market share is in danger, since it viewed itself as superior to the foreign manufacturers. Since then, until today, Japanese cars are regarded as the most reliable cars on the market. The Winner's Circle Change Blindness A, B and C Reference Group Neglect

True

Knowing one's own reservation price is sufficient for making the decision of whether to accept or reject the final offer from the other party. True/False

True

Relative to the present time period, people tend to view all gains and losses in the future to be worth less than they would be in the present. True or False

A temporary reduction in cognitive capacity and a feeling of discomfort.

Research has shown that suppressing stereotypes against out-group members causes:

It focuses too narrowly on explicitly unethical behavior.

Researchers of bounded ethicality claim that the primary flaw of most ethical training is that:

True

Spontaneous behaviors are better predicted by implicit attitudes, while thoughtful behaviors are better predicted by explicit attitudes. True or False

False

The best strategy in negotiation is to get the most important issue resolved in the beginning and then move on to less important issues. True/False

ease of recall

The fact that heavy advertising of a company's or a product's name on billboards and in the media makes that name stick in people's memory as bearing high quality is an example of what bias?

True

The fixed-pie assumption makes the value claiming component of negotiation too salient. True/False

d. all of the above.

The human mind is better at remembering information that is: a. interesting. a. emotionally arousing. b. recently acquired. d. all of the above.

True

The main disadvantage of system 2 thinking is its high resource consumption. True or False

All of the above.

The tendency to escalate commitment is more pronounced when: 1. The commitment is to a failed decision made by oneself. 2. The failure of the initial commitment can be explained with a causal, unrelated account. 3. The escalation is made by an individual, compared with escalation made by a group.

Focalism

The tendency to focus too much on a particular event and too little on other events that are likely to occur concurrently. Reference group Neglect Focalism The Winner's Curse None of these

False

This book takes a descriptive, rather than a prescriptive approach, to studying decision making, meaning that it provides ways to understand actual human decision making, but does not provide tools for improving one's decision processes. True or False

Groups tend to be less prone to escalation of commitment because of the presence of multiple opinions and the higher likelihood of someone recognizing the irrationality of escalating. However, groups display agreement-reinforcing dynamics that unite them behind choices that they made. Therefore, if recognition of the irrationality of escalation does not occur, these group dynamics may lead groups to escalate commitment to a higher degree than individuals.

What are the reasons for the difference between groups and individuals in the likelihood of escalating commitment and in the degree to which commitment is escalated?

To satisfice is to end the search for alternatives when we find a satisfactory solution that achieves a satisfactory level of performance, rather than examine all possible alternatives or look for the best solution.

What is meant by the term "satisfice?"

True

When Moore and his colleagues examined investor behavior in the lab, the participants behaved similar to investors in real markets - they chose too many actively managed funds that made too many trades and charged high fees. True or False

c.the hindsight bias

Which bias occurs only AFTER the true outcome of an event is known? a. retrievability b.ease of recall c.the hindsight bias d.none of the above

Self-serving attributions

Which bias underlies the tendency of people to overclaim credit for their contribution to an outcome?

Disgust.

Which emotion may decrease the endowment effect, causing an owner of a good to lower his or her selling price? Anger. Disgust. Happiness. Fear.

That they themselves are immune from the effects of conflicts of interest.

Which false assumption is often made by professionals such as lawyers, financial advisers and real-estate agents regarding potential conflicts of interest?

Identify reasons for justifying the initial course of action, in order to avoid the creation of cognitive dissonance, which ultimately leads to irrational escalation of commitment.

Which is not a good mechanism for protecting oneself from irrational escalation of commitment?

Commitment to a previous course of action beyond the point prescribed by rational models of decision making.

Which of the following best describes nonrational escalation of commitment?

Change blindness

Which of the following biases is most related to the Slippery Slope theory? System neglect Reference group neglect Change blindness Inattentional blindness

d. All of the above.

Which of the following can serve as a cognitive explanation for misconceptions of chance? a.People expect probabilities to even out. b.People remember unusual sequences better than ones that appear more random. c.People judge probabilities of future events as contingent on past events. d.All of the above.

When the person who is treated unfairly belongs to an in-group.

Which of the following condition can increase one's willingness to engage in altruistic punishment?

a. standards of comparison

Which of the following helps promote more rational decision making? a. standards of comparison b. focus on salient attributes c. the "multiple-selves" approach d. positive, rather than negative, affect

None of the above

Which of the following helps to eliminate the influence of fairness considerations?

c. each party's known information and the other party's position

Which of the following is NOT a key set of information in Raiffa's framework for approaching negotiations? a. each party's BATNA b. the relative importance of each party's interests c. each party's known information and the other party's position d. each party's set of interests

1. They provide us with a simple way of dealing with complex problems.

Which of the following is a typical characteristic of heuristics? 1. They provide us with a simple way of dealing with complex problems. 2. They have the best likelihood of reaching an optimal solution to a problem. 3. They are time and resource consuming. 4.They are used mainly by irrational decision makers.

Pursue mutual disclosure of intentions between you and your competitor.

Which of the following is a useful advice for a competing party that wishes to avoid competitive escalation of commitment?

Self-justification.

Which of the following is an underlying mechanism of escalation of commitment?

Change Blindness

Why it is easier to pass budget cuts in several incremental steps than in the form of one deep cut. Change Blindness Color Blindness System Neglect A and C

Anger

___________________ is a negative emotion that shares many features with happiness, such as increased confidence and decreased sensitivity to risk.

Arbitrary and meaningless.

From a strictly rational standpoint, the price at which a stock was purchased should be regarded as:

None of the above.

How can a sure loss be presented in a less unattractive way? Framing the loss in pseudocertain terms. Framing the sure loss in probability terms, having a 100% probability. Emphasizing the low degree of risk. None of the above.

true

In choices that involve uncertainty, our judgments are affected not only by the framing of the choice in terms of the level risk, but also by the framing of the choice in terms of gains or losses. True or False

False

In creative problem solving, composing a group of people, each with unique knowledge and perspective, is usually enough to avoid the problems of bounded awareness. True OR False

True

In order to avoid falling prey to ease of recall bias, a manager must discount the number of successful and unsuccessful actions taken by employees situated closer to the manager, relative to those of employees who are farther away. True or False

4.To identify when they should move from system 1 to system 2 thinking.

In the interplay between system 1 and system 2 thinking, the key goal for managers is: 1. To improve their use of system 1 thinking. 2. To attempt to use system 2 thinking as much as possible. 3. To apply both systems in making decisions in order to perform a more thorough and complex search for alternatives. 4.To identify when they should move from system 1 to system 2 thinking.

The chosen system depends in part on the level of constraint on people's resources - mainly cognitive load, time, and money. When these resources are not limited, i.e., when people have enough time, money and peace of mind to conduct a thorough decision-making process, they will use system 2 thinking. In contrast, the busier and more rushed people are, the more they have on their minds, therefore they are more likely to rely on system 1 thinking. System 2 is also more likely to take over when people realize that system 1 is failing to produce satisfactory results.

What affects whether System 1 or System 2 thinking will occur? What are the conditions which make the use of one system more likely than the use of another?

All of the above.

What explanation does the book provide for the fact that people are loss-averse, but still accept the sure loss of paying insurance? The vividness of the possibility of losing a big amount of money if they are uninsured leads people to overestimate their risk. The special value pseudocertainty has. Social norms that favor having insurance. All of the above.

The same manner the money was previously invested.

When Samuelson and Zeckhauser (1988) offered their participants to allocate their inheritance money between different options, participants displayed a consistent preference to invest in:

The "NBA" group will estimate higher ticket prices than the "NHL" group. Due to the anchoring bias, the scores that they see, which are higher for basketball games than for hockey games, affects their estimates.

Two groups of people are given score sheets of yesterday's games in a professional league. One group is given the scores of yesterday's games in the National Basketball Association, and the other group is given the scores of yesterday's games in the National Hockey League. The groups are then asked to estimate the average ticket price for a game in the sport of which they read the scores. How will the two groups differ in their estimates? What bias is responsible for this difference?

The expected value of further investment.

When deciding whether or not to escalate commitment to a chosen course of action, our choice should depend on:

b.when there is no other information available

When do people use base-rate data correctly? a.when they are instructed to do so b.when there is no other information available c.when this information confirms their initial hypothesis d.all of the above

True

When people are asked to predict their emotional responses to a negative event, such as a job termination, they expect that their emotional reaction will last longer than it actually does. True/False

True

When people are overwhelmed by an excessive amount of information regarding a particular decision, they often respond by not making a decision at all. True False

c. being sad

Which of the following decreases the reliance on stereotypes? a. self-serving reasoning b. positive illusions c. being sad d. regret avoidance

False

While investors accurately estimate the past performance of the stocks in which they invest, they hold overly optimistic beliefs about these stocks' future performance. True or False

Overconfidence occurs because we are more able to recall confirming than disconfirming evidence for the believed outcome. Our initial beliefs produce selective mental accessibility of information that is consistent with these beliefs. One possible debiasing mechanism is forcing oneself to consider scenarios that include different outcomes than the believed one. Such forced consideration increases the salience and vividness of other possibilities in one's memory. Another one is simply artificially decrease one's estimations of the outcome's likelihood.

Why, according to research, do people tend to be overconfident in estimating outcomes? Suggest a mechanism for tackling overconfidence.

True

On average, actual returns of stocks picked by women are higher than returns of stocks picked by men. True or False

a. general attributes

People are more likely to rate themselves highly on: a. general attributes. b. skills which are easily quantifiable. c. behaviors that are related to being environmentally-friendly. d. performance on easy tasks.

True

The confirmation trap is a primary underlying bias of escalation of commitment. True or False

False

In a competitive auction, continuing to bid after both one and one's competitors have started bidding is considered irrational escalation of commitment. True or False

Not easily identified as irrational.

Specific actions of parties engaged in competitive irrationality are:

Giving bi-monthly bonuses, with each bonus slightly larger than the previous one.

A firm has exceeded its revenue forecast for the year, and wishes to share some of the surplus with its employees. Which of the following schemes is likely to generate higher levels of satisfaction from the employees? Giving bi-monthly bonuses, with the each bonus slightly smaller than the previous one. Giving bi-monthly bonuses, with each bonus slightly larger than the previous one. Giving bi-monthly bonuses of equal amounts. Giving one big bonus at the beginning of the year.

Inattentional Blindness

A firm replaces the receptionist who sits at the front desk and 80% of employees do not even notice that it is a different person who greets them each morning. Inattentional Blindness Focalism System Neglect None of these

c.Candidate X, because experience is harder to evaluate than GPA.

A software company is looking to recruit a new programmer. There are two candidates for the position. The candidates' grade point averages are given, along with the number of programs each has written. I. Candidate X has a GPA of 4.0. His experience consists of writing 10 programs. II. Candidate Y has a GPA of 3.2. His experience consists of writing 70 programs. According to the evaluability hypothesis, which of the candidates will be preferred in case they are evaluated separately, and why? a.Candidate X, because GPA is harder to evaluate than experience. b.Candidate Y, because GPA is easier to evaluate than experience. c.Candidate X, because experience is harder to evaluate than GPA. d.Candidate Y, because experience is easier to evaluate than GPA.

1.Ease of recall.

A survey among tenants of shared apartments asked each tenant what percentage of the cleaning around the apartment he or she does. The survey found that aggregating the percentages for each apartment produces an average of much more than 100%. This result may be due to what bias? 1.Ease of recall. 2.Insensitivity to sample size. 3.Insensitivity to base rates. 4.The conjunction fallacy.

The Winner's Curse

A team was in pursuit to sign a highly sought-after free agent. It gave the player the highest offer of all the teams, and ultimately signed him to a high-paying contract. The player did not live up to expectations during the subsequent season. Change Blindness The Winner's Curse Inattentional Blindness None of these

More comedies and action movies will be rented and less documentaries and art films.

According to the "multiple-selves" theory, if an online DVD rental service could offer same-day deliveries, so that people who order a movie receive it the same day, what change is likely to happen to the rental profile? More documentaries and art films will be rented and less comedies and action movies. More comedies and action movies will be rented and less documentaries and art films. More documentaries and art films will be rented, but less will actually be watched. More comedies and action movies will be rented, but less will actually be watched.

Before opening the presents.

Daniel and Jeremy are brothers. They have found out in advance about what their parents are giving them for Christmas, and have agreed to exchange each other's gifts. When should the exchange be made, in order for the two brothers to be the most satisfied with it? Before opening the presents. Right after opening the presents. A few weeks after receiving the presents, after getting tired of what they received. Answers a and b have equal likelihoods of creating satisfaction.

False

Experience helps countervail the anchoring bias, such that anchoring effects are rarely observable in expert judgments. True or False

a. help overcome the inefficient outcome predicted by game theory.

Face-to-face interaction in negotiations has been found to: a. help overcome the inefficient outcome predicted by game theory. b. enhance the rationality of players as predicted by game theory. c. increase the attentional focus on shared information between the negotiating parties. d. make negotiators more eager to reach agreement in simple negotiations and less eager to reach agreement in complex negotiations.

Regress to the mean.

Over time, the performance of mutual funds tends to:

Their operating fees are lower.

The basic advantage of index funds over actively managed mutual funds is that:

A narrow definition of the problem space.

The most critical barrier to a creative decision is: System 2 thinking. The failure to recognize subtle changes in the situation. The failure to assign appropriate weight to information that is not readily available. A narrow definition of the problem space.

Preferring a nominal wage increase that does not cover inflation over a wage cut.

People display inconsistency by:

Stocks in the long-term.

People probably do not invest enough in:

False

People's assessments of fair allocation of resources are influenced primarily by the importance of attributes affecting what is fair. True or False

b. it requires us to forecast how each alternative solution will achieve each of our decision criteria.

Rating alternatives on each of the decision criteria is considered the most difficult stage of the decision-making process because: a. it assumes we have precisely defined our priorities. b. it requires us to forecast how each alternative solution will achieve each of our decision criteria. c. it requires us to compare all of the alternatives simultaneously. d. it is likely to fail if our problem is not defined correctly, and this failure will not be detected.

Around 6%

Roughly what is the percentage of mutual funds will outperform the market both this year and the next year?

Favorable information.

Self-serving reasoning causes people to pay less critical attention when assessing: Favorable information. Ambiguous information. Probabilities. Threatening information to their sense of self.

False

Since losses loom larger than gains, a big loss upsets us more than two smaller losses of the same total amount. True or False

False

The Slippery Slope theory explains why a single instance of unethical behavior can be justified. True False

False

The Slippery Slope theory explains why a single instance of unethical behavior can be justified. True or False

False

The acquisition utility derived from buying a good is a function of the price paid for the good and its objective value. True or False

d.stock prices go up on sunny days.

The affect heuristic can explain why: a. people who live in California are assumed to be happier than people who live in the Midwest. b. students predict they will be sadder after getting a bad grade on a test than they actually are in these situations. c. people do not remember sad events from their early childhood. d.stock prices go up on sunny days.

False

The anchoring bias affects our value estimates, but not our ability to retrieve information from memory. True or False