Lecture 4: Decision making

Question 1

Rational decision making (avoid biases)

Answer 1

1) Define the problem
2) Identify the decision criteria
3) Weight the criteria
4) Generate alternatives
5) Rate each alternative
6) Determine the optimal decision

Question 2

Rationality

Answer 2

Decision-making process that is logically expected to lead to the optimal result, given an accurate assessment of the decision makers values and risk preferences

Question 3

Bounded rationality (Simon, 1957)

Answer 3

• Our attention is limited
• Our intelligence and self-knowledge are limited
• The information available is often limited

Question 4

Heuristics

Answer 4

Mental shortcuts – helps people make decisions

Question 5

Overconfidence bias

Answer 5

Tendency of being overconfident about our abilities and abilities of others

Question 6

Anchoring effect

Answer 6

Decisions are influenced by a particular reference point/anchor

Question 7

Availability heuristic

Answer 7

Availability of vivid stories in the media biases our perception of the frequency of events

Question 8

Sunk cost effect

Answer 8

Tendency to keep investing recources in an apparently losing situation, because of earlier effort/money/time already spent

Question 9

Intuition

Answer 9

Unconscious, fast, leads to affectively charged judgments –> Can be useful as a way of setting up a hypothesis, but is unacceptable as proof