Ch 1 and 2 Review notes - Summary Judgment in Managerial Decision Making PDF

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Exam Review Chapter 1: Introduction to Managerial Decision Making Judgment refers to the cognitive aspects of our decision-making process. To fully understand judgment, first identify the components of decision-making process that requires it. Consider this following decision situation: You are finishing your MBA at a well known school. Your credentials are quite good and you expect to obtain job offers from a number of consulting firms. How will you select the right job? This proposes a problem and each problem will have a number of alternative solutions. If you do not have alternative, you do not have a decision to make. Six Steps for Rational decision making process* 1. Define problem. Accurate judgment is required to identify and define the problem. Often managers act without a thorough understanding of the problem= solve the wrong problem. Managers often err by (a) defining the problem in terms of a proposed solution (b) missing a bigger problem, or (c) diagnosing the problem in terms of its symptoms. Goal - solve the problem, not just eliminate its temporary symptoms. 2. Identify the criteria. The rational decision maker will identify relevant criteria in the decision making process. Buying a car, your objective can be to maximize fuel economy and comfort while minimizing cost. 3. Weigh the criteria The value may be specified in dollars, points, or scoring system Car = fuel vs comfort, relative value placed on each 4. Generate alternatives Optimal search continues until cost of alternatives outweighs the value of the added information

5. Rate each alternative on each criterion Often the most difficult stage of the decision making process, it requires us to forecast future events. (potential consequences of selecting alternative solutions on each criteria) 6. Compute the optimal decision Process is (1) multiplying the ratings in step five by the weight of each criterion (2) Adding up the weighted ratings across all of the criteria for each alternative, and (3) Choosing the solution with the highest sum of the weighted

ratings System 1 and System 2 thinking System 1: Our intuitive system, fast, automatic, effortless, implicit and emotional Ex: Interpret verbal language or visual information automatically and unconsciously Relied on when people are busier, more rushed and when they have more on their minds System 2: Reasoning that is slower, conscious, effortful, explicit, and logical. Influence our most important decisions Bounds of Human Attention and Rationality Rationality*= decision making process that is logically expected to lead to the optimal result, given an accurate assessment of the decision maker's values and risk preferences. Rational model = based on set of assumptions that prescribe how a decision should be made rather than describing how a decision is made. Individual judgment is bounded in its rationality and that we can better understand decision making by describing and explaining actual decisions rather than by focusing solely on prescriptive ("what would rationally be done") decision analysis Two schools of thought: study of descriptive and prescriptive models Prescriptive model: develop methods for making optimal decisions. Suggesting a mathematical model to help a decision maker act more rationally. Descriptive: How decisions are actually made. 1st - Understand your own decision making process helps you see where you make mistakes= needing better decision strategies 2nd- optimal decision in a given situation often depends on the behavior of others 3rd- good advice about making decisions is available, but most people do not follow it b/c they do not understand how they actually make decisions and do not appreciate the need to improve. Why we "satisfice" (why don't we think rationally) Individual lack important info that would define the problem, the relevant criteria and so on. We search until we find a satisfactory solution b/c its good enough in to examine all possible alternative Factors below: -Time and cost constraints limit the quantity and quality of available information. -We retain very small amount of information in our memory. -Intelligence limitation and perceptual errors constrain the ability of decision makers to accurately "calculate" the optimal choice -Human judgment deviates from rationality

-People rely on a number of simplifying strategies or rules of thumb, these simplifying strategies are heuristics Human judgment is bounded by: 1st Bounded willpower: our willpower is bounded, give greater weight to present concern than to future concerns 2nd- Bounded self interest 3rd- Bounded awareness, broad category of focusing biases or common tendency to overlook obvious, important info 4th- Bounded ethicality, the notion that our ethics are limited in ways of which we are unaware Four General HEURISTICS* Availability : instances or occurrences of that event are readily available in memory, can be useful since we recall events more easily. This will often lead to accurate judgment. It is still fallible because the availability of information is also affected by factors unrelated to the objective frequency of the judged event. An event that evokes emotions and is vivid, easily imagined and specific will be more available than an even that is unemotional in nature, bland, difficult to imagine, or vague. Representativeness: Look for traits the individual may have that correspond with previously stereotypes, Salesman = extroverts, ex-athletes, etc This can cause a person on an unconscious level to engage in race discrimination or other inappropriate behavior Confirmation*: We search for and interpret evidence in a way that supports the conclusions we favored at the outset. It can explain the power of anchoring, in which some irrelevant initial hypothesis or starting point holds undue sway over our judgments. Positive hypothesis testing can trigger the hindsight bias, in which we too quickly dismiss, in retrospect, the possibility that things could have turned out differently than they did. There are always at least four separate situations to consider when assessing the association between two events, assuming each one just has two possible outcomes. Our everyday thinking commonly neglects this. Ex: Is marijuana use related to delinquency? Proper analysis: marijuana users who are delinquents, marijuana users who are not delinquents, delinquents who do not use marijuana, and non-delinquents who do not use marijuana. Affect: system 1, emotional evaluation as basis of their decisions rather a reasonable analysis. used when people are busy or under time constraints Main objective of this book is to improve your judgment.

Chapter 2 - Overconfidence Overconfidence may be mother of all biases. it effects some of the most potent, pervasive, and pernicious of any of the biases we document in this book. Overconfidence has been blamed for wars, stock market bubbles, strikes, lawsuits, bankruptcies, mergers, high rate of trading in the stock market, etc. If we were humble about the quality of our judgments, we could easily double-check our opinions and correct our flaws. Overconfidence has been studied in three basic ways: Over precision In domains where they were The tendency to be too sure our experts, participants knowledge judgments and decisions are was more precise, they specified accurate, uninterested in testing narrower confidence intervals and our assumptions, and dismissive their overconfidence continued of evidence suggesting we might which led to a degree that they be wrong. Leads- overly narrow confidence, often failed to capture the correct answer. too certain that we know the truth Global climate change experts expressed uncertain if when they Overprecision leads people into thinking that their beliefs are more believed that we should take actions to alleviate climate change accurate than those of others =

increases their willingness to trade. Managers make overly precise forecasts of candidate's potential because they think they can be better judge of character.

Overestimation Common tendency to think we are better, smarter, faster, more capable, more attractive, or more popular and so on. Consequence- have more control that we actually do, overestimate how much we will accomplish in a limited amount of time

and many of them had drawn their confidence intervals too narrowly. Pilots crash because they think they know what they are doing and do not listen to others. Causes: -Desire to relieve internal dissonance (not natural state of mind) As evidence, when we are getting advice from others, we prefer to hear perspectives that are similar to our own, despite the fact that hearing different perspectives is more helpful and informative. -Whose who express confidence can earn trust, credibility, and status. E.g. George W. Bush's leadership compared to Kerry. There are costs to being confident and wrong. Consequences We are often in error yet rarely in doubt. We are reluctant to take advice from others, suspicious of those whose views differ from our own, took quick to act on our opinions, too slow to update our erroneous beliefs Term Naive realism =widespread belief that the way we see the world is the only sensible view.

Various manifestations of overestimations are: 1. Self enhancement We tend to believe that the groups to which we belong are superior to other groups. We even like letters in our names compared to others. Overestimate our own performance, abilities, or talents. 2. Illusion of control People think they have more control over circumstances than

they actually do. Little control = overestimate how much control they do have vs opposite. Chance to pick their own lottery ticket numbers are enough to lead people to believe that they can exert control over uncontrollable events vs not getting screened for cancer and acting as if they lack control over something that they do indeed control. 3. Planning fallacy Common tendency to overestimate the speed at which we will . complete projects and tasks. Ex: underestimate the cosst and duration of construction projects such as roads, buildings, etc Optimism can increase the likelihood that the project will move forward. 4. Optimistic biases Tendency to overestimate the rosiness of our future. This may be motivated savoring the prospect of "feels good". Optimism turns to disappointment if your expectation fall short. Easiest way to surpass expectations is to lower them. "Moment of truth" - attempt to manage our expectations strategically. start off full of hope for future, as the moment of actual performance feedback draws near, we tend to reduce our performance expectation, becoming more pessimistic than optimistic. Enables to enjoy the positive surprise or at least avoid the disappointment = this explains why the evidence for overestimation is so inconsistent. We sometimes believe that we are better than we actually are, do we

also believe that we are better than others? lies at the heart of overconfidence Overplacement Tendency to falsely think we rank higher than others on certain dimensions, particularly in competitive contexts. Leads- people to be to interested in competing with others in negotiations, markets, courts, etc

Businesses fail because people believe that they are better than other managers. Mistake of being underplacement = missed opportunities to succeed When comparing to others, people often fall back on evaluating themselves in absolute sense to the population at large rather comparing themselves to the special group. By focusing on themselves, people exaggerate their own abilities and limitations, failing to consider the fact that, quite often, others face similar opportunities and challenges.

Some scholars argue that overconfidence and positive illusions can be good for you = psychological resilience, good well being, capacity to cope with adversity, enhanced self esteem, increase personal commitment, etc. Other hand, there is no study that has shown positive illusion or overconfidence leads to better decisions. Positive illusions can contribute to conflict, discontent, overestimate company's value, set objectives that have little chance of success, likely to have a negative impact on learning and quality of decision making, personnel decisions and responses to crises. Summing up the evidence from the overconfidence, you should strive to be well calibrate. You should match your private beliefs to reality....