COMMERCE 1BA3 Lecture Notes - Lecture 13: Norm (Social), Sunk Costs, Bounded Rationality
2 Mar 2018
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Document Summary
Under bounded rationality, all alternative solutions and probabilities are not known or the decision-maker may be ignorant therefore, things don"t go smoothly for the decision-maker. People avoid incorporating existing data about the likelihood of events ( base rates ) into their decisions. Large samples warrant more confidence than small samples we often ignore this fact. We"re poor at revising estimates of probabilities and values as we acquire additional information ( anchoring effect - 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.
