Judgment and Decision Making[Instructor Name]

[Class and Section Number]

Overview

• Introduction• What is a Rational Decision?• Biases in Decision Making• Contemporary Developments• Fixing Our Decision Making

Introduction

Bounded Rationality – Cognitive limitations prevent humans from being fully rational

Biases – Mistakes that influence judgment

Overview

• Introduction• What is a Rational Decision?• Biases in Decision Making• Contemporary Developments• Fixing Our Decision Making

What is a Rational Decision?

What is a Rational Decision?

Rational Decision Making Define the problem Identify criteria necessary

to judge Weigh the criteria Generate alternatives Rate each alternative Compute optimal decision

Overview

• Introduction• What is a Rational Decision?• Biases in Decision Making• Contemporary Developments• Fixing Our Decision Making

Biases: Overconfidence

Overconfidence - The bias to have greater confidence in your judgment than is warranted based on a rational assessment.

Biases: Anchoring

Anchoring – The bias to be affected by an initial anchor, even if the anchor is arbitrary, and to insufficiently adjust our judgments away from it.

10 – 100 – 200?The size of your anchor does matter.

Biases: Framing

Framing - The bias to be systematically affected by the way in which information is presented.

Positive or negative? Influence of frame

Biases in Decision Making

Overview

• Introduction• What is a Rational Decision?• Biases in Decision Making• Contemporary Developments• Fixing Our Decision Making

Contemporary Developments

Bounded Willpower – We give greater weight to present concerns over future ones.

Contemporary Developments

Bounded Self-interest – Our own behavior is influenced because we care about the outcomes of others.

Contemporary Developments

Bounded Ethicality – Our ethics are limited in ways that we don’t realize.

Bounded Awareness – There is a broad array of focusing failures that affect our judgments.

Overview

• Introduction• What is a Rational Decision?• Biases in Decision Making• Contemporary Developments• Fixing Our Decision Making

Fixing Our Decision Making

System 1 System 2

Fixing Our Decision Making

Fixing Our Decision Making

4.25% 99.98%

Appendix A: Problem 1

1. Year Harvard was founded2. Value of Yale University’s endowment (2010)3. # of acres of housing at UT (2013)4. Nobel prizes won by UC Berkley’s faculty,

alumni, and researchers (2013)5. # of undergraduates at Northwestern Univ.

(2013)

Appendix A: Problem 1

6. Pulitzer prizes won by faculty and alumni of Boston University (2013)

7. 2012-2013 annual budget for U PENN8. # of academic staff members at Carnegie

Mellon University (2013) 9. # of postgraduate students at Massachusetts

Institute of Technology (2013) 10. # of colleges and universities in Boston area

Appendix A: Problem 1

1. 1636 6. 222. 19.4 billion 7. 6.007 billion3. 1,438.5 8. 1,4234. 71 9. 6,5105. 8,425 10. 52

Appendix B: Problem 2

• > 10 in 1000 firms?

• _______ in 1,000 Big Four clients have significant executive-level management fraud

Appendix C: Problem 3

• Program A– 200 people saved

• Program B– 1/3 probability 600 people saved– 2/3 probability 0 saved

Appendix C: Problem 3

• Program C– 400 people will die

• Program D– 1/3 probability 600 people saved– 2/3 probability 0 saved

Photo AttributionSlide 1

Photo Credit: koocbor https://www.flickr.com/photos/30451996@N00/4420042160/ https://creativecommons.org/licenses/by-sa/2.0/

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Slide 13

Photo Credit: Charles H. Bennett http://commons.wikimedia.org/wiki/File:The_Ant_and_the_Grasshopper_by_Charles_H._Bennett.jpg http://commons.wikimedia.org/wiki/Public_domain

Slide 15Photo Credit: Suzi Edwards-Alexander https://www.flickr.com/photos/8810771@N07/3141342119/ https://creativecommons.org/licenses/by-nc-nd/2.0/

Slide 17

Photo Credit: Martin Whitmore https://www.flickr.com/photos/rustychainsaw/3064090492/in/photostream/ https://creativecommons.org/licenses/by-nc-sa/2.0/

Slide 18Photo Credit: zampano!!! https://www.flickr.com/photos/20875074@N00/268351934/ https://creativecommons.org/licenses/by-nc-nd/2.0/