Managerial Decision Making

http://DSign4Analytics.com

Cognitive BiasesJanuary 24 2017Prof. M. MINHAJ

Cognitive Biases

Working with Data

Decisions under Risk

Kindly Note

• Interaction in the class is important (your English is not being assessed !)

• Reading assignments and the recommended use of web resources / tools is an absolute prerequisite for meaningful class participation.

What are your expectations from the course ?

The context of the course….

Border less economy

Business Agility

Unceasing technological innovations

Social Issues

Survival of the fittest

Managerial Decision Making• Management is a process by which

organizational goals are achieved by using resources– Inputs: resources– Output: attainment of goals – Measure of success: outputs / inputs

• Management Decision Making• Decision making: selecting the best solution

from two or more alternatives

Why Decision Making is difficult ?• Information systems, advanced search engines, and

globalization result in more and more alternatives to choose• Government regulations and the need for compliance,

political instability and terrorism, competition, and changing consumer demands produce more uncertainty, making it more difficult to predict consequences and the future

• Other factors are the need to make rapid decisions, the frequent and unpredictable changes that make trial-and-error learning difficult, and the potential costs of making mistakes

Types of decisions

Gory and Scott-Morten Framework

Simon’s Decision Making Model

Three Steps : Intelligence, Design and Choice.

Intelligence Phase : The problem is identified, and information is collected concerning the problem.

Design phase : Alternatives are developed. This phase may involve a great deal of research into the available options.

Choice Phase : Alternatives that are developed in the design phase are evaluated and one of them is chosen.

 

Bounded rationality• It is the idea that when individuals make decisions,

their rationality is limited by the tractability of the decision problem, the cognitive limitations of their minds, and the time available to make the decision.

• Decision-makers in this view act as satisficers, seeking a satisfactory solution rather than an optimal one.

• Herbert A. Simon proposed bounded rationality as an alternative basis for the mathematical modeling of decision-making, as used in economics, political science and related disciplines.

• It complements "rationality as optimization", which views decision-making as a fully rational process of finding an optimal choice given the information available.

Reading Assignment

• Bounded rationality - Use Google Scholar• The Hidden Traps in Decision Making (HBR

article) – Use the course portal (http://DSign4.biz)

Cognitive Biases

Class Activity

Anchoring Trap

Ex. Population of a Country

The Framing Effect

Ex. Decision to perform a operation

Endowment Effect

Status quo bias

The Sunk Costs Trap

Ex. Movie Ticket

Avoiding Traps

• Brainstorming and Formal Models• Decision Trees

Decision Trees• Symbols used :

• The numbers on the edges coming out of circle (chance node) denote the probabilities.

Choice Node

Chance Node (Nature)

Edges connecting the nodes