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Chapter 12

BUS 272 Chapter Notes - Chapter 12: Decision-Making, Bounded Rationality, Confirmation Bias


Department
Business Administration
Course Code
BUS 272
Professor
Christopher Zatzick
Chapter
12

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Chp 12: Decision Making, Creativity, and Ethics
How Should Decisions Be Made?
Decision - The choice made from two or more alternatives
Decision making is a reaction to a problem or an opportunity
o Problem - A discrepancy between some current state of affairs and some desired state,
requiring consideration of alternative courses of action
o Opportunity - Occurs when something unplanned happens, giving rise to thoughts about new
ways of proceeding
The Rational Decision-Making Process
Rational - Refers to choices that are consistent and value-maximizing within specified constraints
Rational Decision-Making Model - A six-step decision-making model that describes how individuals
should behave in order to maximize some outcome
1. Define the Problem: Poor decisions caused by overlooking problem or defining wrong problem
2. Identify the Criteria: Determining what is relevant in making the decision, bringing interests,
values and preferences into the process
3. Allocate Weights to the Criteria: Prioritizing importance of criteria
4. Develop Alternatives: List ways to resolve problem
5. Evaluate the Alternatives: Strengths and weaknesses
6. Select the Best Alternative
Assumptions:
1. Problem Clarity: Problem is clear and unambiguous
2. Known Options: Relevant criteria identifiable and can list workable alternatives
3. Clear Preferences: Criteria and alternatives can be ranked
4. Constant Preferences: Decision criteria are constant
5. No Time or Cost Constraints
6. Maximum Payoffs: Choose alternative that yields highest perceived value
How Do Individuals Actually Make Decisions?
Bounded Rationality in Considering Alternatives
Bounded Rationality - Limitations on a person's ability to interpret, process, and act on information
o List will represent familiar criteria and tested solutions
o Individuals settle for alternative that is "good enough"

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o Satisfice - To provide a solution that is both satisfactory and sufficient
Intuition
Intuitive Decision Making - A subconscious process created out of a person's many experiences
o Not rational, but not wrong
o Does not operation against rational analysis, but rather complements it
o Best applied when:
time is short
policies do not give clear-cut advice
there is a great uncertainty
quantitative analysis needs check and balance
Judgment Shortcuts
Overconfidence Bias - Error in judgment that arises from being far too optimistic about one's own
performance
o Individuals whose intellectual and interpersonal abilities are weakest most likely have
overconfidence bias
Anchoring Bias - A tendency to fixate on initial information, from which one then fails to adequately
adjust for subsequent information
o Takes place most often during negotiations
Confirmation Bias - The tendency to seek out information that reaffirms past choices and to discount
information that contradicts past judgments
o Information we gather is typically biased toward supporting our views, influencing where we look
for information
Availability Bias - The tendency for people to base their judgments on information that is readily
available to them rather than complete data
o Tend to overestimate unlikely events (plane crashes) than likely events (car crashes)
o Managers tend to give more weight to recent behaviours than previous behaviours
Escalation of Commitment - An increased commitment to a previous decision despite negative
information
o Demonstrate initial decision was not wrong and avoid having to admit mistakes
Randomness Error - The tendency of individuals to believe that they can predict the outcome of random
events
o Decisions are impaired when we try to create meaning from random events
Winner's Curse - The tendency for the winning participants in an auction to pay too much for the item
won
o The more bidders there are, the more likely some will have greatly overestimated the value
Hindsight Bias - The tendency to believe falsely after an outcome of an event is actually known, that one
could have accurately predicted that outcome
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