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Chapter 11

BUS 2090 Chapter Notes - Chapter 11: Bounded Rationality, Sunk Costs, Confirmation Bias

Course Code
BUS 2090

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Chapter 11- Decision Making
* items marked by a italicize and bold may be found in “key terms
What is “Decision Making?”
The process of developing a commitment to some course of action
o Involves making a choice among several action alternatives
o A process that involves more than simply the final choice among alternatives
o Involves some commitment of resources; time, money or personnel
A process of problem solving (alternate definition)
o Involves the perception of the existing state, the conception of the desired state, and the steps
required to move from one state to the other
Well-Structured Problems:
A problem for which the existing state is clear, the desired state is clear, and the steps required to switch
from state to state are clear
o Simple solutions; may be repetitive and familiar
o Ex. Assistant Bank Manager which of these 10 loan applications should I approve?
o Organizations attempt to program decision-making for Well-Structured Problems- rules, routines,
standard operation procedures, rules of thumb
Ill-Structured Problems:
A problem for which the existing and desired states are unclear, and the method of getting to the desired
state is unknown
o Unique; unusual and have not been encountered before
o Ex. The Vice President of Marketing may have a vague feeling that the sales of a particular
product are too low
o Can entail high risk and stimulate strong political considerations
The Compleat Decision Maker- A Rational Decision-Making Model
Perfect vs Bounded Rationality:
Perfect Rationality - a decision strategy that is completely informed, perfectly logical, and oriented toward
economic gain
o Perfectly rational characteristics do not exist in real decision makers and therefore bounded
rationality is suggested
Bounded Rationality a decision strategy that relies on limited information and that reflects time
constraints and political considerations
o Framing and cognitive biases illustrate the operation of bounded rationality, as does the impact
of emotions and mood on decisions

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Problem Identification and Framing:
Perceptual Defense
o Perceptual system may act to defend the
perceiver against unpleasant perceptions
Problem defined in terms of functional specialty
o Selective perception can cause decision
makers to view a problem as being in the domain of their own
specialty even when some other perspective may be warranted
Problem defined in terms of solution
o Form of “jumping to conclusions”
Problem diagnosed in terms of symptoms
o Concentration on surface symptoms will
provide little clue to an adequate solution
o Real problem involves the cause of the
When a problem is identified it is usually framed in some way
o Ex. A $10,000 expenditure can be framed as a cost (something to be avoided) or an investment
(something to be pursued)
o Decision makers should be self-conscious about how they have framed problems and consider
alternative frames
Information Search:
Too little information sometimes decision makers do not acquire enough information to make a good
o Several cognitive biases contribute to this, particularly confirmation bias
Too much information can also damage the quality of decisions
o Information overload can lead to errors, omissions, delays, and “cutting corners”
Alternative Development, Evaluation and Choice:
A perfectly rational decision maker may can exhibit maximization
A decision maker working under bounded rationality frequently satisfices rather than maximizes
o Ex. A Human Resources Manager who feels that absenteeism becomes too high may choose an
arbitrary acceptable level, then accept the first solution that seems likely to achieve this level;
organizations rarely seek to “maximize attendance
Risky Business:
When a problem is framed as a choice between losses, people tend to make risky decisions; gambling on a
sure loss
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