Decision Making

Question 1

Rational Decision Making

Answer 1

Process of choosing a course of action of different alternatives. A method for systematically selecting among possible choices that is based on reason and facts

Question 2

The idea of Homo Economicus John Stewart Mill

Answer 2

Our welfare is determined by a utility function-process of ongoing optimization of the opportunities we perceive to have. Humans, according to Mill, always try to achieve well define, specific and determined goals for the lowest possible costs.

Question 3

Rational Decision Making Model

Answer 3

-Define the problem; Problem Clarity
-Identify the criteria Known Options
-Allocate weights to the criteria Clear Preferences
-Develop alternatives-Constant Preferences
-Evaluate alternatives No time/ cost constraints
-Select the best alt. Max payoff

Question 4

Limitations of Rational Decision Making Module

Answer 4

-Studies based on game theory shows that people don’t always act rationally.
-Often decisions need to be made on the spot. No time to assess all alternatives
-Choice can be confusing too much going on
-The rational decision making model doesn’t take into consideration: risk taking, intuition, lack of self-control, procrastination, political and social conditions etc., It is a very conservative model and might be more fitting for a long term decision making.
-Takes way too long. Sometimes you want to be the first to market.

Question 5

Actual Decision Making

Answer 5

-Bounded Rationality; Limitations on one’s ability to interpret, process, and act on information(Ikea effect- the more effort you put in sth, the more value you feel)
*Satisficing; instead of maximizing utility we satisfice and look for good enough solutions(1st available option rather than optimal one)
*Intuition;A non-conscious process created from distilled experience that results in quick decisions
-Judgement Shortcuts

Question 6

What concept is the combination of the words Suffice and Satisfy ?

Answer 6

Satisficing( Herbert Simon)

Question 7

What is the least rational tools to help decision

Answer 7

Intuition

Question 8

Is intuition the same as instinct?

Answer 8

No, instinct an innate tendency towards a particular behavior(reflex)

Question 9

We often make decions based on what

Answer 9

Perceptions (Attribution theory- internal and external factors)
Fundamental attribution theory- overestimating intenal than external factors

Question 10

Heuristics

Answer 10

Mental shortcuts that ease the cognitive load of making a decision.

Question 11

Biases

Answer 11

-Overconfidence bias: Believing too much in your ability
-Dunning Kruger effect: How difficulties in recognizing one’s own incompetence lead to inflated self-assessments.
-Confirmation/info processing bias: Selecting and using only facts that support our decision
-Availability bias: emphasizing info. that is most readily at hand.
-Randomness Error: tendency to believe that we can predict the outcome of random events.
-Risk aversion: play it safe
*Loss aversion-risk of loss is stronger than the potential gain.
*Sunk cost Fallacy: Tendency to persist in an activity because of previously invested effort, time or money
*Irrational Escalation of Commitment: : Tendency to continue to commit to a failing course of action. Often due to an unwillingness to admit mistake. Typically results in Sunk Cost Effects
-Anchoring bias: using early, first received info as a basis for making subsequent judgements.
-Planning Fallacy: The tendency of people to underestimate the duration of time to complete a specific task or project
-Hindsight; Tendency to believe we could accurately predict the outcome, after the outcome of the even is known

Question 12

Expected value - certainty equivalent = what

Answer 12

risk premium

Question 13

Diff. bet. sunk cost and escalation commitment

Answer 13

While sunk cost effect occurs due to the investment of time and money, escalation of commitment occurs due to cognitive effort and social commitment