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HUman Resource
Non-programmed Decisions
Bounded Rationality
Satisficing: satisfy and suffice, is a decision-making
strategy that attempts to meet an acceptability threshold.
Herb Simon
Bounded Rationality
Satisficing
Human beings lack the cognitive resources to optimise :
We usually do not know the relevant probabilities of
outcomes,
We can rarely evaluate all outcomes with sufficient
precision, and our memories are weak and unreliable.
So we choosing acceptable alternative to resolving a
problem or pursuing an opportunity. Usually cost, time
frame, resources
Herb Simon
2 modes of thinking
System 1 (Automatic System)
Humans*
Econs*
Motivational Biases
Confirmation Bias
Hindsight Bias
Escalation of Commitment
Positive (ego-centric) Illusions
Availability
Representativeness
Anchoring and Adjustment
Framing
Emotion-related Biases
Priming
Availability Bias
Ease of recall
Retrievability
Presumed associations
Cause of Death
Estimated
Actual #
of Deaths
Homicide
59%
18,361
Alzheimers
41%
74,632
Words with n
Number of words
Estimated
Actual #
of Deaths
Start with n
54%
18,361
46%
74,632
Words in a Novel
Seven Letter
words that have
the 6th letter n.
____i
ng
_____n _
1-2
3-4
5-7
8-10
11-15
16+
1
12
24
44
44
89
Which should be the bigger number?
21
19
30
45
42
21
40
Representative Bias
Actual #
of Deaths
Hospital A
7%
Hospital B
40%
18,361
53%
74,632
And
below-average score on day 1 = below-average talent + unlucky (day 1)
On day 2
The golfer who did well on day 1 is likely to be successful on day 2 as
well, but less than on the first, because the unusual luck he probably
enjoyed on day 1 is unlikely to hold.
The golfer who did poorly on day 1 will probably be below average on
day 2, but will improve, because his probable streak of bad luck is not
likely to continue.
2005
$12,000,000
$11,500,000
$11,000,000
$10,500,000
$10,000,000
$9,500,000
$9,000,000
$8,500,000
$8,000,000
total
$90,000,000
2008
$99,000,000
2005
2008
$12,000,000
$13,159,588
$11,500,000
$12,140,823
$11,000,000
$11,630,902
$10,500,000
$11,173,406
$10,000,000
$10,784,104
$9,500,000
$10,591,434
$9,000,000
$9,302,815
$8,500,000
$9,079,831
$8,000,000
$8,400,617
$90,000,000
$99,000,000
total
Linda
3.61
Which of
these should
have the
5.25
lowest
probability?
4.77
LOCATION
Fancy Resort Hotel
Small Grocery Store
Should there be a
difference in the
numbers?
311 IR
227 IR
Engineers salary
Which estimate do
you expect to be
higher?
41,482
84,424
Framing
Version 1 (Gain Frame)
Plan A
Plan B
Plan A: 57%
Plan B: 43%
Plan A: 41%
Plan B: 59%
Overcoming Heuristics
Recognize when you are using them
Distinguish between situations when they are used
appropriately vs. inappropriately
Is more information available
Is attaining more information cost effective
Motivational Biases
Confirmation Bias
Hindsight Bias
Escalation of Commitment
Positive (ego-centric) Illusions
Availability
Representativeness
Anchoring and Adjustment
Framing
Emotion-related Biases
Priming
Motivational Biases
Escalation of Commitment
Confirmation Bias
Hindsight Bias
Positive (Ego-centric) Illusions
Competitive
All their competitors jumped on the bandwagon and provided a similar frequentflyers program.
Several competitors enhanced what they offered by doubling the air miles.
They also offered points for car rentals, hotel accommodations and other innovative
tactics.
The airlines continued this escalating competition through the early 1980s as each
airline tried to outdo their competitors.
In 1987, Delta Airlines offered triple miles to any passenger who charged their
tickets on their American Express card for all of the year of 1988.
Analysts took a hard look what this would actually mean as a cost to the airline
industry. They estimated that the airlines combined would end up owing their
passengers somewhere between $1.5 and $3 BILLION dollars in free trips. Whew!
This was not small change to say the least.
Time was running out on the Viacom executives and advisers who
hunkered down to a Sunday-afternoon skull session Unless Viacom
came back fast and hard, everyone present knew, the fight would soon be
over one thought dominated all those at the meeting: how to throw a
knockout punch that would be, as one of them put it, a Diller-killer.
Things go badly
Us
Them
Externalities
Abilities
Item
Your decision making abilities
76
64
Your intelligence
76
On average,
what should
70
these
numbers be?
70
59
62
60
Newsweek Survey
Whos going to heaven?
O.J. Simpson
Bill Clinton
Michael Jordan
Mother Theresa
Yourself
19%
52%
65%
79%
87%
Newsweek Survey
Whos going to heaven?
O.J. Simpson
Bill Clinton
Michael Jordan
Mother Theresa
Yourself
19%
52%
65%
79%
87%
Motivational Biases
Confirmation Bias
Hindsight Bias
Escalation of Commitment
Positive (ego-centric) Illusions
Availability
Representativeness
Anchoring and Adjustment
Framing
Emotion-related Biases
Priming
Intuition
Do we have expertise?
Does it fit the situation?
Are you close or close enough?
Expert intuition
All heard such stories of expert intuition: the chess master who walks
past a street game and announces White mates in three without
stopping, or the physician who makes a complex diagnosis after a
single glance at a patient. Expert intuition strikes us as magical, but it is
not
Perhaps the best short statement of it is by the great Herbert Simon,
who studied chess masters and showed that after thousands of hours
of practice they come to see the pieces on the board differently from
the rest of us.
The situation has provided a cue; this cue has given the expert access
to information stored in memory, and the information provides the
answer. Intuition is nothing more and nothing less than
recognition.
De-biasing Yourself 1 of 2
Availability Heuristic
Representative Heuristic
Seek out and use base rates
Dont make strong conclusions based on small samples
Be aware of making causal inferences when chance and regression to the mean
are equally plausible explanations
Make events or individuals more unique, harder to categorize (e.g., describe
inconsistencies in personal characteristics)
Present disconfirming evidence within logic of bias
Increase diversity, i.e., involve more individuals with varied biases
De-biasing Yourself 2 of 2
Framing effects
Re-frame the problem frame all problems in terms of both gains and losses
Discuss arguments in terms of both losses and gains
Be very mindful of language and associations (if someone is talking about the
avian flu what are they invoking?
Positive illusions
Seek outside-alternate (non-ego) view points
Seek disconfirming evidence
Summary
Purely rational decision making is rarely used and often not
practical
Individuals rely on heuristics to make decisions
These are often biased
Are sometimes not appropriate