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Chapter 11

MGHB02H3 Chapter Notes - Chapter 11: Bounded Rationality, Sunk Costs, Cognitive Bias

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Brian Connelly

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MGHB02 – Week 4: Decision Making:
Chapter 11: Decision Making (pp. 384-409):
What Is Decision Making?
-Decision making – the process of developing a commitment to some course of action
oChoice among several action alternatives
oProcess that involves more than simply the final choice among alternatives
oCommitment involves some commitment of resources (time, money, personnel)
-Problem – a perceived gap between an existing state and a desired state
-Well-structured problem – a problem for which the existing state is clear, the desired stated is clear, and how to
get from one state to the other is fairly obvious
oSimple problems and solutions arouse little controversy since problems are repetitive and familiar
oProgram – a standardized way of solving a problem (rules, routines, standard operating procedures,
rules of thumb)
Short-cut of decision-making process  goes directly from problem identification to solution
Some come from experience and only exist “in the head” while others are more formal
-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
oUnique problems  unusual and have not been encountered before
oComplex and involve a high degree of uncertainty
oFrequently arouse controversy and conflict among interested people in decision
oMust resort to non-programmed decision making
Try to gather more info and be more self-consciously analytical in their approach
oEntail high risk and stimulate strong political considerations
- Decision process model:
oProblem is identified  search for info begins
oInfo clarifies nature of the problem  suggests alternative solutions
oAlternatives are carefully evaluated  best is chosen for implantation
oImplemented solution is monitored over time  ensure immediate and continued effectiveness
oIf difficulties occur  repetition and recycling may be affected
The Compleat Decision Maker – A Rational Decision-Making Model:
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-Perfect vs. Bounded Rationality:
oPerfect rationality – a decision strategy that is
completely informed, perfectly logical, and oriented
toward economic gain (economic person)
oBounded rationality – a decision strategy that relies on
limited info and that reflects time constraints and
political considerations
oFraming – aspects of the presentation of info about a
problem that are assumed by decision makers (bounded
oCognitive biases – tendencies to acquire and process
info in an error-prone way (bounded rationality)
-Problem identification and framing (bounded rationality):
oPerceptual defence  defend the perceiver against
unpleasant perceptions
oProblem defined in terms of functional speciality  selective perception can cause decision makers to
view a problem as being in the domain of their own speciality even when some other perspective might
be warranted
oProblem defined in terms of solution  form of jumping to conclusions effectively short-circuits the
rational decision-making process
oProblem diagnosed in terms of symptoms  concentration of on surface symptoms will provide the
decision maker with few clues about an adequate solution
oWhen a problem is identified, it is necessarily framed in some way  facts might be the same but
different decision frames might lead to very different decisions
oRational decision makers:
Must be very self-conscious about how they framed problems
Should try out alternative frames
Should avoid overarching, universal frames
-Information search:
oToo little info
Several cognitive biases contribute to this case
Mentally lazy and use whatever info is most readily available  resides in memory  remember
vivid recent events
Confirmation bias – the tendency to seek out info that conforms to one’s own definition of or
solution to a problem (overconfident in their decision making)
oToo much info
Information overload – the reception of more info than is necessary to make effective decisions
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Can lead to errors, omissions, delays, and cutting corners  reduces quality of decisions
Attempt to use all info on hand  gets confused and uses low-quality/irrelevant info to influence
their decisions
oDecision makers seem to think that more info is better because:
Confidence in decisions will increase
May fear being “kept in the dark” and associate the possession of info with power
oCognitive bias is present when valuing advice for which they have paid over free advice of equal quality
-Alternative Development, Evaluation, and Choice:
oMaximization – the choice of the decision alternative with the greatest expected value
oExpected value of each alternative is calculated by multiplying its ultimate value by its probability
oAnchoring effect – the inadequate adjustment of subsequent estimates from an initial estimate that
serves as an anchor
oCan reduce some basic cognitive biases by making people more accountable for their decisions
Reasoned reports, formal presentations how decision was reached, etc.
Accountability MUST be in place BEFORE a decision is reached
oCan evaluate alternative solutions against a single criterion  economic gain
Bounded rationality  should consider more criterion  decision-making task ↑in complexity
oSatisficing – establishing an adequate level of acceptability for a solution to a problem and then
screening solutions until one that exceeds this level is found
Evaluation of alternatives ceases and the solution is chosen for implantation
oLimited search for alternatives can lead to tunnel vision
-Risky Business:
oViewing problem as choice between losses  tend to make more risky decisions
oViewing a problem as choice between gains  tend to make conservative decisions  sure wins
oImportant to be aware of what reference point when framing decision alternatives
oLearning history can modify these general preferences for or against risk
-Social implementation:
oPerfectly rational decision maker  factor any possible implementation problems in choice of solution
oBounded decision maker  attempt to do the same when estimating probabilities of success
oDecision makers tend to be dependent on others to implement their decisions
oSequential process leads to confusion, conflict, and delay
Can be prevented if using cross-functional teams during decision-making process
-Solution Evaluation:
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