Decision Making Overview

Question 1

System 1 Thinking

Answer 1

System 1 is capable of making quick decisions, based on very little information.
– Intuitive decision making
– Emotional, implicit, typically fast and automatic
– Sufficient for many every day decision situations

Question 2

System 1 Thinking: Example

Answer 2

how would you decide which seat to take in a waiting room, which pasta sauce to buy, or whether to change lipstick colors?

Maybe the man sitting in the corner reminds you of your high school math teacher… maybe your eye is instinctively drawn to the dark red label on the pasta sauce… maybe your barista was wearing a flattering new shade of lipstick this morning?

Question 3

System 2 Thinking

Answer 3

They require attention and slow, effortful, considered responses. Collecting as much information about each option as possible, asking your friends, family or colleagues for advice, or making a list of pros and cons for each option
– Effortful reasoning; slower, conscious, explicit
– Rational and logical – more complex processing
– Should be used in our most important decisions

Question 4

System 2 Thinking: Example

Answer 4

How would you decide which college to attend, which house to buy, or whether to change careers?

Making a pros and cons list, doing research, asking around for reviews.

Question 5

Rational (optimal) decision making

How SHOULD we decide

Answer 5

is the process that is logically expected to lead to the
optimal result

-Compensatory models (remember Consumer
Behavior?)
– Expected utility theory (from Economics)

Question 6

Example of Rational Optimism

Answer 6

Buying a car is one process where I know that I have optimized in the past.  Here are some of the factors I consider when I buy a car:
-price
-color
-reliability
-safety
-capacity (cargo and people)
-warranty
-appearance
Taking in these factors into account to make the best decision.

Question 7

Satisficing ( aka Bounded Rationality)

How DO we decide

Answer 7

when people make decisions they sometimes don’t look for the optimal choice, but they make a choice that is satisfactory and sufficient for the given circumstances.

Theory by Herb Simon

Question 8

Example of Satisficing

Answer 8

Why might we satisfice versus optimize in making a decision? Here are a few reasons to consider:

time constraints
impact of a wrong choice
cost
external perception
organizational strategy, culture or direction

Question 9

Bounded Rationality

Answer 9

Herb Simon states that “boundedly rational agents
experience limits in formulating and solving
complex problems and in processing (receiving,
storing, retrieving, transmitting) information”
(https://www.economist.com/news/2009/03/20/herbert-simon read link for better understanding)