Lecture 1: Common Cognitive Bias and Problem Complexity

Question 1

Common cognitive biases

Answer 1

Systematic patterns of deviation from norm or rationality in judgment

Question 2

Criteria for a good decision process

Answer 2

1. Procedural rationality: procedure that leads to the final decision can be more or less rational
2. Rational preferences: consistent assumptions in the decision scenario

Question 3

Procedural rationality

Answer 3

• tackle the right problem
• put the appropriate effort in information search
• derive proper expectations using relevant objective data
• think carefully about objectives and preferences

Question 4

Rational preference

Answer 4

1. Prospective orientation
2. Completeness
3. Transitivity
4. Independence of irrelevant alternatives
5. Invariance

Question 5

Prospective orientation

Answer 5

Decisions should be forward looking -> ignore sunk costs

Question 6

Completeness

Answer 6

Decision maker has a preference for any pair of alternatives (indifference is allowed)

Question 7

Transitivity

Answer 7

If a is better than b and b is better than c, then a should be better than c.

Question 8

Independence of irrelevant alternatives

Answer 8

Given the set of alternatives {a, b}, if a is better than be, then for the set {a, b, c}, a should still be preferred over b.

Question 9

Invariance

Answer 9

Preferences should not be affected when the same problem is presented in a different way. (Example: 200 are alive or 400 die)

Question 10

Why is it important to characterise a good decision?

Answer 10

• Check whether you have done the best job given the resources spent
• Can you justify the decision even if a bad outcome was realised?

Question 11

Decompose complex decisions (4 Steps)

Answer 11

1. Objectives (what do you want?)
2. Alternatives (what can you do?)
3. Uncertain events (what do you (not) know?)
4. Outcomes (what is the impact of choices?)

Question 12

Do we know our objectives?

Answer 12

No, people tend to generate an inadequately narrow set of objectives

Question 13

Where to look for objectives?

Answer 13

1. Obvious insufficiencies: Things your are currently not happy with
2. Comparison of alternatives: Differences between alternatives might help you to realise what is important to you
3. Strategic goals: Some objectives are not directly linked to your current decision but of overall interest (e.g. company reputation)
4. External guidelines: Guidelines should indicate an important objective
5. Impact of other people: Consider the objectives of other people who might be affected by the consequences of our decision

Question 14

Fundamental objectives

Answer 14

• relevant for their own sake without further justification

- Example (vehicle regulations): maximise safety, minimise loss of life, …

Question 15

Means objectives

Answer 15

• relevant because they help to achieve a more fundamental objective
• Example (vehicle regulations): Educate public, more traffic lights, …

Question 16

Objectives hierarchy

Answer 16

• Diagram of relationships between objectives, sub-objectives and attributes
• All objectives in a hierarchy should be fundamental
• Most general objective at the top
• Higher levels represent more general objectives
• Lower levels represent more specific statements
• Lowest levels represent attributes based in which the alternatives will be compared
• Attributes are used to characterise performance in relation to an objective

Question 17

Criteria for an ideal set of fundamental objectives

Answer 17

1. Completeness: all fundamental objectives are included
2. Simplicity: Small set of objective is easier to communicate and estimate
3. No redundancies: Avoid double counting or overlapping objectives
4. Preference independence: preferences of a subset of objectives should be independent of the attribute levels of the remaining objectives
5. Measurability: achievement of objectives should be measurable

Question 18

Attributes

Answer 18

• unambiguous ratings of how well alternatives do with respect to each objective
• quantitative or qualitative
• useful for describing consequences of alternatives and making value tradeoffs between objectives

Question 19

A good attribute should be … ?

Answer 19

• Direct
• Operational: low cost of information collection
• Comprehensive: attribute levels cover the full range of possible consequences
• Understandable: units should make sense to the DM
• Unambiguous: we should have the same interpretation of the same attribute level

Question 20

Types of Attributes

Answer 20

1. Natural
2. Zero or One Measures
3. Constructed Measure

-> Prefer natural attributes!

Question 21

Natural Attribute

Answer 21

• Is in general use with a common interpretation by everyone

- E.g. cost in dollar, weight in kg, time in hours

Question 22

Zero or One Measures

Answer 22

• Describe whether the alternatives have a specific attribute or not
• E.g. Diploma (yes or no)

Question 23

Constructed Measure

Answer 23

• Is developed for a particular decision problem
• E. g. five point scale to measure ease of use
• Group natural attributes to obtain a discrete attribute when the natural attribute is to specific (e. g. excellent, good, ok, bad)

Question 24

Goal of decision analysis

Answer 24

The goal is to make better, more rational decisions.

• Prescriptive decision theory aims to teach the method and concepts that support and improve rational decision making
• Descriptive decision theory aims to raise your consciousness about decision-making by pointing out the errors and biases in it