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Lecture 10

BUS 272 Lecture Notes - Lecture 10: Bounded Rationality, Confirmation Bias, Satisficing


Department
Business Administration
Course Code
BUS 272
Professor
Christopher Zatzick
Lecture
10

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Decision Making and Organizational Culture (chapter 10&12)
1. Decision Making
Example:
Choosing university
oWhere do I want to study
oCost, distance from home, rankings (quality), program, scholarship,
sports
oAllocate weights: 1) Cost 2) Ranking 3) Scholarship
Layoffs
oPerformance, attitude, $, network, skills, seniority
The Reality of Decision Making in Organizations
Why rational decision-making is hard to do:
1) Bounded rationality
2) Judgment shortcuts in the decision-making process
3) Use of intuition to make some decisions
Bounded Rationality
Bounded Rationality
oIndividuals make decisions by constructing simplified models that
extract the essential features from problems without capturing all
their complexity
Satisficing
oIdentifying a solution that is “good enough”, not using all the criteria
Decision-maker will choose a final solution that satisfices
Judgment Shortcuts
Ignoring the base rate:
Availability bias: base judgement on info that is readily available and not
complete data
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Confirmation bias: Seek out information that reaffirms part choices and
discount the one’s that contradict
Escalation of commitment: increase information despite negative info
Overconfidence bias: error in judgement by being too optimistic about one’s
own performance
Framing (frame the answers)
oGave kids candies
EX.: 1 set of kids: 3 Hershey kisses for free, you get to keep
these but I’m going to give you a choice (give me 1 and I’ll give
you a mini candy bar)  you have to give me something to
receive something else
Ex2: Free shipping at amazon if pay more than 100$  people
might buy useless things
Intuitive Decision Making
Intuitive Decision Making
oA subconscious process created out of experience
When used
oWhen it’s hard to make any kind of rational analysis of the
information
oWhen there is time pressure
Group vs. Individual Decision Making
Strengths of Group Decision Making
Generates more complete information and knowledge
Offers increased diversity of views
Generates higher quality decisions
Leads to increased acceptance of a solution
Weaknesses of Group Decision Making
More time consuming
Risks of groupthink
Discussion can be dominated by one or a few members
Decisions suffer from ambiguous responsibility
Groupthink
Phenomenon in which the norm for consensus overrides the realistic
appraisal of alternative courses of action
Why does this occur? Peer pressure
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