W5 - Decision Making

Question 1

What are the 3 constraints of our rational decisions?

Answer 1

1. Informational constraints
   - Problems of attention
   - Problems of memory
   - Problems of comprehension
   - Problems of communication
2. Time
3. Political & external considerations

Question 2

How do we cope with informational constraints?

Answer 2

Cognitive resources
(We might just not have the capacity as humans to take all info that’s available and integrate it in a meaningful way to make a better decision)

Question 3

What are the 5 decision-making styles?

Answer 3

1. Intuition
2. Satisficing
   (eg. doesn’t matter if I go A or B, both options are sufficient in satisfying what I want)
3. Advice-seeking
4. Indecisiveness
5. Heuristics - Using mental shortcuts
   (eg. I had chicken before and liked it, let me order the same)

Question 4

Hsee & Weber (1999). Journal of Behavioral Decision Making, 12, 165-179.

What are the 3 hypotheses?

Answer 4

1. Risk as value hypothesis:
   It is desirable to take risks and hence you rate your in-groups as more likely to take risks.
2. Risk-neutral / Risk-as-feelings hypothesis:
   We have difficulty imagining people’s risk preference in the abstract (eg. foreigners), and so we estimate that they are risk neutral.
3. Risk-stereotype hypothesis:
   Some groups are seen as risk-taking and members are hence evaluated as being risk taking (this stereotype is based on whether the society is a market or hierarchical society)

Question 5

Hsee & Weber (1999). Journal of Behavioral Decision Making, 12, 165-179.

Which type/group of people are perceived as more risk-taking?

Answer 5

Both Americans and Chinese thought Americans would be more risk-taking.

But Chinese was found to be more risk-taking than Americans.

Question 6

Why was the Chinese found to be more risk-takers?

Answer 6

1. Cushion hypothesis:
   The adverse outcome of a risky financial option may be less severe in collectivistic than individualistic cultures.
   Hence, the close social network that Chinese enjoys acts as a ‘cushion’ to hold the members in case they fall. They can turn to those around them for financial assistance if needed.

**Cushion hypothesis only applies in FINANCIAL context.

2. Situational-economic hypothesis:
   Countries with rapidly developing economies (emerging) often provide more business opportunities and less regulation, thereby making risk taking more beneficial

Question 7

What other factors influence one’s risk-taking?

Answer 7

• Dispositions (Personality traits)
• Affect (Emotions)
• Context (Situational factors)
• Object of risk (Financial vs Medical context)
• Perceived risk
• Social exclusion

Question 8

Weber et al. 1998:
Studied thousands of proverbs and selected to be based on risks.

Which culture should have more proverbs advocating risk?

Answer 8

Collectivistic culture, as justified by cushion hypothesis.

Question 9

Weber et al. 1998:
Which culture should have more proverbs about social risks and social networks?

Answer 9

Collectivistic culture (Chinese)

Question 10

Weber et al. 1998:
Which country should have more proverb applicable to financial risk

Answer 10

No difference observed.

Question 11

Weber et al. 1998:
Why do the Chinese take more risks than Americans?

Answer 11

It may be deeply rooted in the Chinese culture.

Question 12

What is the Escalation of Commitment?

Answer 12

The tendency to repeat an apparently bad decision or allocate more resources to a failing course of action.

–> Irrational to do so as one pays too much attention to what is already invested instead of considering the likelihood of success.

Question 13

Why do we escalate our commitment?

Answer 13

1. Self-justification
   Want to believe that we make good decisions
2. Gambler’s Fallacy
   “So it’s not going well, surely that has to turn around right?”
3. Perceptual blinders:
   Tend to surround ourselves with people who share our beliefs
4. Closing costs
   Don’t want to lose what we have already invested on (irrational)
5. Norm for consistency
   Want to be seen as having integrity and consistency
6. Search for additional information
   Continue to search for more information to reconcile the inconsistent situation

Question 14

How to prevent / fix escalation of commitment?

Answer 14

Set a clear exit criteria + Appoint someone to be the devil’s advocate.

“Let’s re-evaluate and see if it promises success.”

Question 15

Wong & Kwong, (2004) Journal of Applied Psychology, 90, 284-294.

Answer 15

Demonstrates how framing effects (how we frame information) influence our subjective evaluations, and hence decision-making.

eg. 95% success vs. 5% failure

Question 16

Extraneous Factors: Danziger et al. (2011)

Premise?
*Studies mental fatigue

Answer 16

Judicial rulings may not just be based solely on laws and facts.
–> Psychological, political & social factors influence rulings too.

Likelihood of a favourable ruling is greater at the very beginning of the work day OR after a food break.
(we make easy decisions when we are tired)

Question 17

Extraneous Factors: Danziger et al. (2011)

How can mental fatigue be restored?

Answer 17

Replenish cognitive resources: More pay, more break, improve mood, give them autonomy.

(When resources are depleted, the decision maker typically makes the easier decision)

Question 18

Wong, Ormiston, & Haselhuhn (2011): A face only an investor could love: CEO’s facial structure

Premise?

Answer 18

Identified leaders’ facial structure as a specific physical trait that correlates with organisational performance.

CEOs with wider faces relative to facial height (facial width-to-height ratio) achieve better financial performance.

Question 19

Wong, Ormiston, & Haselhuhn (2011): A face only an investor could love: CEO’s facial structure

What is the effect of a greater facial width-to-height ratio?

Answer 19

Greater WHR is linked to aggression, making one look more imposing.

Aggression leads to power and more resources. Powerful people then tend to seek opportunities, focus on the bigger picture, attend to task-relevant information, and engage in goal-directed behaviour.

Question 20

Wong, Ormiston, & Haselhuhn (2011): A face only an investor could love: CEO’s facial structure

Moderator?

Answer 20

The moderator is cognitive complexity.

If a team has high cognitive complexity, they can better mitigate the effects of aggression.

Question 21

What is the prospect theory?

Answer 21

It provides us a framework for understanding how people make choice decisions.

Question 22

What is Frame of Reference in prospect theory?

Answer 22

Eg. Ground beef is 75% lean vs. 25% fat.

Positive frame leads one to believe most other ground beef has more fat.

Negative frame leads one to believe that most other beef has less fat.

Question 23

What is the decoy effect?

Answer 23

When an inferior choice alternative (i.e., decoy) influences choice between superior alternatives

Question 24

Why does decoy effect work in decision making?

Answer 24

1. Dominance Heuristic
   People prefer the dominating option (the target) because it simplifies decision-making. Choosing the target avoids the need to weigh complex trade-offs and provides a justifiable, clear rationale for the choice, both to oneself and others.
2. Context-dependent Weighting
   People focus on the feature that both the target and the decoy are good at. This makes the target stand out even more and feel like the best choice, even if other factors might suggest otherwise.

Question 25

What purpose does Anchoring and Adjustment have in decision making?

Answer 25

When making an evaluation, we let initial information (even irrelevant information) serve as a starting point (anchor) from which we then adjust when new information is provided.

Although our final evaluation might not be the same as the anchor, it has a significant impact on the evaluation.