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Lecture

# COMM 151 Lecture Notes - Bounded Rationality, Sunk Costs, Information Overload

Department
Commerce
Course Code
COMM 151
Professor
Christopher Miners

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Chapter 11 Decision Making
What Is Decision Making?
Decision making process of developing commitment to some course of action
3 noteworthy things about decision making
o Choice making a choice among alternatives
o Process involving final choice and how decision reached
o Resources committed to carry out decision
Process of problem solving
Problem perceived gap between existing state and desired state
o Perception of existing state
o Conception of desired state
o Gap between two above
Well-Structured Problems
Existing state clear
Desired state clear
How to get from e to d is clear
Problems are repetitive and familiar
Program decision making for well-structured problems
o Because decision making takes time and is prone to error
Program standardized way of solving a problem
o Enables decision maker to go from problem identification to solution directly
o Aka. Rules, routines, standard operating procedures, rules of thumb, application forms
Ill-Structured Problems
Existing state unclear
Desired state unclear
How to get from e to d unknown
Generally unique problems (have not been encountered before)
Non-programmed decision making
The Compleat Decision Maker A Rational Decision-Making Model
Problem identified -> search for information -> alternative solutions -> evaluate solutions -> best chosen for
implementation -> implemented solution monitored
Perfect vs. Bounded Rationality
Perfect rationality decision strategy completely informed, perfectly logical, and oriented toward economic gain
Economic Person perfect, cool, calculating decision maker
o Can gather information about problems and solutions without cost ; completely informed
o Perfectly logical if A > B, and B > C, then A > C
o Has one criterion economic gain
Recycle
Identify problem
Search for information

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Alternative solutions
Evaluate solutions
Choose best solution
Implement solution
Monitor and evaluate solution
Bounded rationality decision strategy relying on limited information and reflecting time constraints and political
considerations
Framing aspects of presentation of information about problem that are assumed by decision makers
Cognitive biases tendencies to acquire and process information in an error-prone way
Problem Identification and Framing
Problem exists when gap occurs between existing and desired state
Gaps signalled by
o Dissatisfied customers
o Vigilant employees
o Press
Bounded rationality lead to difficulties in problem identification
o Perceptual defence perceptual system defend perceiver against unpleasant perceptions
o Problem defined in terms of functional specialty selective perception cause you to view problem as being
in domain of their own specialty when other perspective is warranted
Marketing guy focus on marketing solution to poor sales
o Problem defined in terms of solution jumping to conclusions
o Problem diagnosed in terms of symptoms concentration on surface symptoms, real problem or cause of
problem not diagnosed
Problem identified -> framed
o Different decision frames lead to different decisions
o Eg. Can I have a Tube? vs. Hey man, how are the Tubes?
Information Search
Search might be slow and costly
Too little information damage quality of decision
o Lead to errors, omissions, delays, and cutting corners
o Attempt to use all information
o More is not necessarily better
o Think more is better
Associate information with power
o Managers
Gather information that has little relevance
Use information after decision to justify decision
Request information they dont use
Complain theres not enough information even though they ignore available information

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Alternative Development, Evaluation, and Choice
Maximization choice of decision alternative with greatest expected value
Bounded rationality
o Not know all alternative solutions
o Ignorant of the ultimate values and probabilities of success
Violations of standard statistic principles
o People avoid incorporating known existing data about likelihood of events
o Large samples warrant more confidence than small samples
o Overestimate odds of complex chain of events occurring (final destination)
o Poor at changing estimates of probabilities and values as they get new information
Not adjust estimates from initial estimate (anchor)
Can reduce basic cognitive biases
o People more accountable for decision
Accountability in place before decision
After-the-fact accountability people try to protect their identity
Satisficing decision maker establishes adequate level of acceptability for solution and then screening solutions
until one that exceeds level is found
o When solution found, evaluation of alternatives cease
Power of framing
o Alternative A settle out of court and accept sure loss of \$25 million
o Alternative B go to court expecting 50% probability of \$50 million loss (potential for greater loss)
As opposed to
o Alternative C settle out of court and save \$25 million that could be lost in court (less risky)
o Alternative D go to court expecting 50% probability of saving \$50 million
Choice between losses
o Make riskier decision
o Rolling dice in face of sure loss
Choice between gains
o Make conservative decision
o Protecting sure win
Solution Implementation
Rational decision maker factor in implementation problems
Decision makers are often dependent on others to implement their decisions