Decision Making

Question 1

What is Decision Making?

Answer 1

The process of developing a commitment to some course of action

A process of problem-solving
To close gap between current state and desired state

Two types of problems:
Well-Structured
Ill-Structured

Question 2

How Do We Make Decisions?

Answer 2

1. Perfect Rationality
2. Bounded Rationality

Question 3

Rational Decision Making Process

Answer 3

1. identify a problem
2. search for relevant information
3. develop alternative solutions
4. evaluate alternative solutions
5. choose best solution
6. implement chosen solution
7. monitor and evaluate chosen solution

Question 4

Perfect Rationality

Answer 4

A decision strategy that is completely informed, perfectly logical, and (typically) oriented toward economic gain.

Question 5

Bounded Rationality

Answer 5

A decision strategy that relies on limited information and that reflects time constraints and political considerations.

Question 6

Cognitive Biases

Answer 6

Tendencies to acquire and process information in an error-prone way

Question 7

Confirmation Bias

Answer 7

Tendency to seek information that confirms, while ignoring information that disconfirms

Question 8

Information Overload (Paradox of Choice)

Answer 8

• People think they want all the options, but…
• The reception of more information can be more than necessary to make decisions
• Leads to errors, omissions, delays, cutting corners, overconfidence, and individual stress—i.e., more information ≠ better decision

Question 9

Prospect Theory (Kahneman & Tversky)

Answer 9

• Equivalent alternatives are presented in a way that changes decision making
• We value gains and losses differently, so when presented with an equal choice = gains > losses
• Hence, language matters!
• If information is framed positively (gain frame) -> encourages conservative decisions
• If information is framed negatively (loss frame) -> encourages riskier decisions

Question 10

Framing Effects

Answer 10

Aspects of the presentation of information about a problem that are assumed by decision makers

Question 11

Availability Heuristics

Answer 11

Tendency to predict the frequency of an event or a proportion within a population based on how easily or how readily available an example can be brought to mind

Question 12

Representativeness Heuristic

Answer 12

Tendency to judge the probability or frequency of a hypothesis by considering how much the hypothesis resembles available data as opposed to using true data

Question 13

Anchoring

Answer 13

• Inadequate adjustment of subsequent estimates from an initial estimate that serves as an anchor
• Tendency to rely too heavily on one piece of information when making decisions; we are not a “blank slate” in decision making
• Initial anchor -> adjustment -> final decision

Question 14

Escalation of Commitment

Answer 14

Tendency to invest additional resources in an apparently failing course of action implied by the decision

Question 15

Hindsight Bias

Answer 15

Tendency to review the decision-making process to find out what was done right (in the case of success) or wrong (in the case of failure)

Question 16

Dunning-Kruger Effect

Answer 16

Tendency for people with lower expertise, skill, or experience with a certain type of task or area of knowledge to overestimate their abilities (vs. higher skilled underestimate their abilities)

Question 17

cognitive biases often lead to..

Answer 17

“decision-based evidence making” rather than “evidence-based decision making”

Question 18

Disadvantage: Group Polarization

Answer 18

Tendency of group members to shift toward more extreme positions than those they initially held as a result of group discussion

Question 19

Disadvantage: Groupthink

Answer 19

Group pressure to damage the mental efficiency, reality testing, and moral judgment of decision-making groups

Question 20

Contemporary Approaches to Improve Decision Making

Answer 20

1. Evidence-Based Management: Different sources at different stages
2. Crowdsourcing: outsourcing aspects of a decision process to a large collection of people
3. Analytics and Big Data: Using math and statistics to derive meaning from data in order to make better business decisions.