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MGHD27H3 Study Guide - Confirmation Bias, Sunk Costs, Bounded Rationality


Department
Management (MGH)
Course Code
MGHD27H3
Professor
txtbooknote

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Chapter 11 Decision Making
What is Decision Making?
Decision Making: The process of developing a commitment to some course of
action.
oInvolves a choice among alternatives, process involves how the decision is
reached, and involves a commitment of resources (e.g., time if a store decides
to carry a large inventory).
Problem: A perceived gap between an existing state and a desired state.
Decision making process involves the perception of the existing state, the conception
of the desired state, and the steps taken from one state to another.
Well-Structured Problems
Well-Structured Problem: A problem for which the existing state is clear, the
desired state is clear, and how to get from one state to the other is fairly obvious.
Problem is repetitive, familiar, simple, and arouses little controversy.
Program (Rules, Routines, Standard Operating Procedures, or Rules of Thumb): A
standardized way of solving a (well-structured) problem. Shortens the decision-
making process by enabling the decision maker to go directly from problem
identification to solution.
Ill-Structured Problems
Ill-Structured Problem: A problem for which the existing and desired states are
unclear and the method of getting to the desired state is unknown. Unique (unusual,
have not been encountered before).
Tend to be complex and involve a high degree of uncertainty often arouses
controversy and conflict among people who are interested in the decision.
Cannot be solved with programmed decisions (must use non-programmed decision
making). Therefore, decision makers are likely to gather more information and be
more self-consciously analytical in their approach.
Can entail high risk and stimulate strong political considerations.
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The Rational Decision-Making Process:
The Complete Decision Maker A Rational Decision-Making Model
Perfect versus Bounded Rationality
Perfect Rationality: A decision strategy that is completely informed, perfectly
logical, and oriented toward economic gain.
Bounded Rationality: A decision strategy that relies on limited information and
that reflects time constraints and political considerations (e.g., the need to please
other organizational members).
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Framing, cognitive biases, and the impact of emotions and mood on decisions
illustrate the operation of bounded rationality.
Framing: Aspects of the presentation of information about a problem that are
assumed by decision makers. Could include assumptions about the boundaries of a
problem, the possible outcomes of a decision, or the reference points used to decide if
a decision is successful.
Cognitive Biases: Tendencies to acquire and process information in an error-prone
way. Constitute assumptions and shortcuts that can improve decision-making
efficiency, but often lead to errors in judgment.
Problem Identification and Framing
Perfectly rational decision makers are great problem identifiers.
Bounded rationality can lead to the following difficulties in problem identification:
oPerceptual Defence Perceptual system may act to defend the perceiver
against unpleasant perceptions.
oProblem 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.
oProblem Defined in Terms of Solution Jumping to conclusions effectively
short-circuits the rational decision-making process.
oProblem Diagnosed in Terms of Symptoms Concentration on surface
symptoms will provide the decision maker with few clues about an adequate
solution (e.g., the real problem is the cause of the morale problem).
Facts can be the same but different decision frames might lead to very different
decisions.
Rational decision makers should (1) be self-conscious about how they have framed
problems (e.g., assumption that this is a product innovation problem); (2) try
alternative frames (e.g., imagine that we dont need a new product here); and (3)
avoid overarching, universal frames (e.g., corporate culture gone wild).
Information Search
Perfectly rational decision makers have free and instantaneous access to all
information necessary to clarify the problem and develop alternative solutions.
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