Decision Making

1
 Significance of DM
 Poor decisions can have enormous toll on the organization and
Society

 Rationality of Human Decision Making limited

 Herbert Simon (1950’s) : Bounded Rationality

 “Capacity of human mind for formulating and solving

complex problems is very small”

 Constraints by Environment
- Limited Resources
- Limited Time
- Quality & Quantity of Information
- Usable Memory

 Perception Driven
 Why Aren’t Always Rational

 COGNITIVE BIASES

 Tversky and Kahnemann coined in 1970’s based on

bounded rationality.

 People’s systematic but flawed patterns of responses to

judgement and decision problems.
 Why Aren’t Always Rational
 System 1 Thinking: Intuitive Thoughts

 System 2 Thinking: Conscious Reasoning

- Slow
- Effortful
- Logical

 Impulsive and Intuitive Choices in Complex Decisions that

require System 2 Thinking.

 Saying Things to Disappointed boss S2

 Fall back to System 1 Thinking when Busy

 Why Aren’t Always Rational
 Heuristics: Mental Shortcuts or Rule of Thumb

- Past Experiences
- Stereotypes
- Emotional Reactions

 Harden into Biases

 Cognitive Biases
 Common Biases
 Framing (Gain : Risk Averse or Loss: Risk Taking)

 The Confirmation Trap

 The Availability Heuristics (Ease of Recall)

 The Anchoring Effect (Initial Estimate: Salary, Sales

Target, Budget)
 Common Biases

 Overconfidence (Mother of all Biases)

 The Representativeness Heuristics

 Escalation of Commitment
How We Should Behave Versus
How We Do Behave
Tips for Overcoming Biases
Questions
 Structured Decision Making

 Define the Problem

Generate Alternatives

Identify the Relevant Criteria

Weight the Criteria

Evaluate each Alternative on each Criteria

Compute the Optimal Decision

 Better Decision Making

Implement System 2 Thinking

-Evaluate all alternatives simultaneously

-Reflection on System 2 Thinking
-Outsider Perception
-Increasing Accountability for Decisions in
Organizations
-Look for Information that disconfirms your view
-Using analytical tools