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