Lecture 4- Decision Making

Question 1

Riskless Choice: MAUT (Multi­Attribute

Utility Theory)

Answer 1

1. Identify relevant alternatives
2. Identify dimensions on which they differ
3. Weigh the importance of each of the dimensions
4. Rate each of the alternatives on each of the dimensions
5. Calculate the totals and, voila! The Answer!

Question 2

Chain of events: Decision trees

Answer 2

1. Each outcome is described on a line
2. Each chance joint gets a circle
3. Compute probabilities, write them below line
4. Each choice joint gets a square
5. Compute value of each branch

Question 3

The rational approach.

Answer 3

1. Define the problem
2. Identify decision criteria
3. Weight the criteria
4. Generate alternatives
5. Rate each alternative on each criterion
6. Compute the optimal decision
   …requires subjective probabilities, weights, etc.

Question 4

Confirmation bias

Answer 4

• Confirmation trap
• Sampling on dependent variable
• Overconfidence

Question 5

Confirmation trap (and how to avoid)

Answer 5

• tendency to search for, interpret, favor, and recall information that is consistent with our beliefs
• People have narrow attention and zero in on the places they expect to help them resolve the issue

What to do:
• Ask yourself why you might be wrong. Actively seek out disconfirmatory information

Question 6

Sampling on dependent variable (and ways to avoid)

Answer 6

including cases in which some phenomenon of interest has been observed and excluding cases in which the phenomenon was not observed

Ex. Carter Racing only showed failed races and their correlating temps

What to do:
• Even if data are used to support an argument, be critical of the sample
• Is it plausible that subjects (people, orgs, etc) not included in the sample exhibited the same behavior as those included? If so, the behavior could not have caused the outcome!!

Question 7

Overconfidence (and ways to avoid)

Answer 7

Tendency to overestimate one’s ability –- less acute or reverses for unfamiliar tasks

Example- survey where everyone said they were more likely to be honest and less likely to ride a unicycle

What to do:
• Recognize when this may present a problem

Question 8

Types of Availability Bias

Answer 8

Retrievability (words that start with “a” vs “a” as the 3rd letter)
• memory structures affect the search process
Ease of recall (War deaths get more visibility)
• making decisions based on vividness of information
Anchoring (Taj Mahal and phone #)
• paying attention to irrelevant “anchors” when making decisions

Question 9

Availability

Answer 9

Tendency for people to base judgments on recent or readily available information
and pay too little attention to relevant historical data
Examples:
• People overestimate the actual frequency of recent and memorable facts
• Recent performance holds undue influence in personnel performance appraisal
• People take precautions to protect themselves against the risks they have most
recently experienced

Question 10

Retrievability (and how to avoid)

Answer 10

Example: Estimate the percentage of words in the English language that begin with the letter vs a as the 3rd letter

What to do:
Be aware of areas you might have this bias due to media or what you are surrounded by

Question 11

Anchoring and insufficient adjustment (and how to avoid)

Answer 11

Tendency to make judgments consistent with some prior cue or anchor regardless of the relevance of that anchor
Anchoring arises from mental mechanisms of selective accessibility
• First impression effects
• The power of first offers in negotiation
• List prices on cars, houses

Example- Taj Mahal

What to do:
• Consider reasons why a given anchor might be inappropriate, and consider other possible anchors
• Disregard any anchors

Question 12

Representativeness

Answer 12

Tendency to assume that a member of a group shares all the features of others
members in that group
It may lead to:
• Insensitivity to base rates (e.g. Down syndrome example in reading)
• Conjunction fallacy

What to do:
• Think critically about cause and effect
• Collect good data and avoid assuming causal relationships without supportive
evidence

Question 13

Framing

Answer 13

Tendency for people to make different decisions based on how the problem is
presented (Nobel Prize in Economics 2002)
• People are risk-seeking in the domain of losses
• People are risk-averse in the domain of gains

Ex. would you rather win $50 for sure or 50/50 win $0 or $100

Question 14

Feeling less confident?

Decision making key takeaways

Answer 14

You should have less trust in your “gut” instincts
Anticipate ways in which your own decisions are likely to be biased
Anticipate others’ biases
• Help them make more rational decisions
• Exploit their errors