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Video Lecture: Decision Making

Terms in this set (18)

Rational Decision-Making Process
- Define the problem
- set the objective and identify the criteria
- Weight the criteria
- Generate alternatives
- Rate each alternative on each criterion
- Computer the OPTIMAL decision and implement
- Learn from your decision; update
Bounded Rationality
- people have limits or boundaries on how "rational" they can be
- Knowledge and/pr information is always incomplete
- Time and cost constraint limit the quantity and quality of available information
- Decision makes retain only a relatively small amount of information in their usable memory; serves as another constraint
To be rational decision makers, we should
- Identify the problem by thoroughly and considering all interested parties
- Develop an exhaustive list of alternative to consider as solutions
- Evaluate all the alternatives simultaneously
- Use accurate information to evaluate alternatives
- Pick the alternative that maximizes value
Bounded rationality says we are likely to
- Boil the problem down to something that is easily understood
- Come up with a few solutions that tend to be straightforward, familiar and similar to what is currently being done
- Evaluate each alternative as soon as we thinks of it
- Use distorted and inaccurate information during the evaluation process
-Pick the first acceptable alternative(satisfice)
System 1: "Fast"
- Unconscious, effortless, automatic, quick
- without self-awareness or control
System 2: "Slow"
- Deliberate, conscious, effortful
- With self-awareness or control
Decision Biases
Systematic (and predictable) deviations from rationality
Narrow Framing
- Defining options to narrowly; not considering alternatives
- For 71% of corporate decisions, only one alternative is considered
- Also called "black and white thinking"
Availability Bias
- Our memory is strongly influenced by what is personally ,most relevant, recent and/or dramatic
- We judge events that are more 1) vivid 2) easily recalled from memory, and/or 3) specific or recent to be more likely than equally probable events that are less available in memory
Sampling on the Dependent Variable
- Selecting cases on the basis of meeting a criteria (e.g. successful CEOs") and then using those cases as evidence - or lack thereof - about those criteria
- To predict whether or not a startup will succeed, you need to know about successes and failures
Survivorship Bias
Sampling on DV is a form of Survivorship bias: only looking at what exists, and failing to take into account what doesn't exist and/or data you are missing from these exclusions
Sunk Cost Bias
Costs that have already been incurred and cannot be recovered
- When people have invested lots of money, time, or effort into something, they are unlikely to discontinue(even when stopping is the best idea)
- "escalation of commitment"
Risk Aversion
People prefer sure outcomes over "gambles" with equal or higher expected values (simonsohn, 2009)
Counteracting Biases
- Begins with awarness - you understand and can you recognize these biases in you and others?
- Understand your own fallibility
- Frame the problem in multiple ways; consider more alternatives
- Have an outside, unbiased advisor to serve as a sounding board
- Build in time to question your and others' assumptions
- Evaluate the decision-making process of your team not just the result
- Have a list of decision-making criteria(checklist) and collect data (e.g. take detailed notes during an interview and during the review period)
- Evidence-based decision-making
- Mentally step outside of yourself; create some distance (ask yourself how you would advise a friend; role play a competitor and how they might think about a situation, etc)
Premortem Technique
- Once a decision is "almost made", a special meeting is called.
- "Imagine you implemented the decision that you are about to go with. It is one year after implementation and the decision turned out to be a disaster. Write a brief history of that disaster."
- It legitimizes dissent. It rewards people for being imaginative and for finding flaws in the current plan.
- Find a healthy balance between optimism and realism
Peer Review
a review by people with similar professional qualification
Devil's advocacy mindset/culture
- Darwin's two notebooks: one for observations in support of his emerging conclusions about evolution, another for observation inconsistent with his emerging conclusions
- Build an effective team around you - one in which candid dialogue and debate takes place
- Purposely seek out diverse opinions
- Create risk-free anonymous reporting channels
- Don't reveal your preferences and thoughts before receiving input from others (silence yourself)
Takeaways
- We tend to be "cognitive misers" and take frequent mental shortcuts
- Be aware of these shortcuts and guard against them
- We simply cannot know everything - know what you don't know
- Foster a culture of constructive dissent
- Surround yourself with people who know more than you and are willing to tell you about it
- Have mentors outside your unit and organization
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