What is decision making?
* Decision making: process of developing a commitment to some course of action, making a choice among several action alternatives A problem exists when a gap is perceived between some existing state and some desired state * Well-structured problems: the existed state is clear, the desired state is clear and how to get from one state to the other is fairly obvious (simple) * Ill-Structured problems: a problem for which the existing and desired states are unclear and the method of getting to the desired state is unknown (difficult - risky)
Perfect vs. Bounded Rationality:
- Economic/Perfect rationality: analytical information processing is thorough and systematic (completely informed, perfectly logical, and orientated toward economic gain) - Bounded rationality: heuristic information processing relies on rules that simplify decision making (relies on limited information and that reflects time constraints and political considerations) - Framing and cognitive biases both illustrate the operation of bounded rationality, as does the impact of emotions and mood on decisions - Framing: the aspects of the presentation of information about a problem that are assumed by decision makers - Cognitive biases are tendencies to acquire and process information in an error-prone way
Problem Identification and Faming:
- Bounded rationality can lead to the following difficulties in problem identification: * Perceptual defense: a perceptual system may act to defend the perceiver against unpleasant perceptions * Problem defined in terms of functional specialty: Selective perception can cause decision makers to view a problem as being in the domain of their own specialty even when some other perspective might be warranted * Problem defined in terms of solution: this form of jumping to conclusions effectively short-circuits the rational decision making process * Problem diagnosed in terms of symptoms: a moral problem – a concentration on surface symptoms will provide the decision maker with few clues about an adequate solution
Alternative Development, evaluation, and choice:
- Now the decision maker can list alternative solutions to the problem, examine the solution, and choose the best one - Maximization: the choice of the decision alternative with the greatest expected value - Problems for bounded rationality:
* People avoid incorporating known existing data about the likelihood of events into their decisions * Large samples warrant more confidence than small samples * Decision makers often over estimate the odds of complex chains of events occurring * People are poor at revising estimates of probabilities and values as they acquire additional info anchoring effect: the inadequate adjustment of subsequent estimates from an initial estimate that serves as an anchor Satisfying: establishing an adequate level of acceptability for a solution to a problem and then screening solutions until one that exceeds this level is found
* Choosing between decision alternatives often involves an element of risk and the research evidence on how people handle such risks is fascinating * When people frame the alternatives as a choice between gains they tend to make conservative decisions, protecting the sure win
* When evaluating the implemented solution, the decision maker is effectively examining the possibility that a new problem has occurred * The bounded decision maker might encounter problems at this stage: * Justification – people tend to be overconfident about the adequacy of their decisions, one way to avoid dissonance is to avoid careful tests of the adequacy of the decision (sunk costs: permanent losses of resources incurred as the result of a decision) * Escalation of commitment: the tendency to invest additional resources in an apparently failing course of action although attempts...
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