MGTS1601 Lecture 13: Decision Making 2
Lecture 13 - Decision Making 2
Weak Intuitive Statisticians
● Under bounded rationality, all alternative solutions and probabilities are not known
or the decision-aker a e igorat therefore, thigs do’t go soothl for the
decision-maker.
● People aoid iorporatig eistig data aout the likelihood of eets ase rates
into their decisions.
● Large samples warrant more confidence than small samples – we often ignore this
fact.
● We’re poor at reisig estiates of proailities ad alues as e acquire additional
iforatio ahorig effet - inadequate adjustment of subsequent estimates
from an initial estimate that serves an anchor) *important
Solution Evaluation
● The perfectly rational decision maker should be able to evaluate the effectiveness of
a decision with calm, objective detachment.
● The bounded decision might encounter problems at this stage of the process:
● Justification
● Hindsight - tendency to review the decision-making process to find what was done
right or wrong.
Sunk Costs
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Document Summary
Under bounded rationality, all alternative solutions and probabilities are not known or the decision-(cid:373)aker (cid:373)a(cid:455) (cid:271)e ig(cid:374)ora(cid:374)t therefore, thi(cid:374)gs do(cid:374)"t go s(cid:373)oothl(cid:455) for the decision-maker. People a(cid:448)oid i(cid:374)(cid:272)orporati(cid:374)g e(cid:454)isti(cid:374)g data a(cid:271)out the likelihood of e(cid:448)e(cid:374)ts (cid:894)(cid:862)(cid:271)ase rates(cid:863)(cid:895) into their decisions. Large samples warrant more confidence than small samples we often ignore this fact. We"re poor at re(cid:448)isi(cid:374)g esti(cid:373)ates of pro(cid:271)a(cid:271)ilities a(cid:374)d (cid:448)alues as (cid:449)e acquire additional i(cid:374)for(cid:373)atio(cid:374) (cid:894)(cid:862)a(cid:374)(cid:272)hori(cid:374)g(cid:863) effe(cid:272)t - inadequate adjustment of subsequent estimates from an initial estimate that serves an anchor) *important. The perfectly rational decision maker should be able to evaluate the effectiveness of a decision with calm, objective detachment. The bounded decision might encounter problems at this stage of the process: Hindsight - tendency to review the decision-making process to find what was done right or wrong. The justification of faulty decisions is best seen in the irrational treatment of sunk costs. Sunk costs are permanent losses of resources incurred as a result of a decision.
