Week 13_OBHR

• Rational Decision-Making


  Process of choosing a course of action of a number of different alternatives
• Rational Decision-Making


  • Makes consistent, value-maximizing choices within specified constraints
  • Assumption of classical/Neoclassical economics
• Rational Decision Making Model


  How decisions "should" be made
• Rational Decision Making Model

  • Problem clarity: The problem is clear and unambiguous
  • Known options: The decision maker can identify all relevant criteria and viable alternatives
  • Clear preferences: The criteria and alternatives can be ranked and weighted
  • Constant preferences: Specific decision criteria are constant and the weights assigned to them are stable over time
  • No time or cost constraints: Full information is available because there are no time or cost constraints
  • Maximum payoff: The choice alternative will yield the highest perceived value
• Rational Decision-Making Model has assumptions that might not be met
• Evidence says "no" - this is not really how we make decisions
• Many management theories are based on economics which treats "economic agents" as "opportunistic"/ "self interest seeking with guile"
• Bounded Rationality


  Limitations on one's ability to interpret, process, and act on information
• Satisficing


  Identifying a solution that is "good enough" rather than the optimal one
• Intuition


  A non-conscious process created from distilled experience that results in quick decisions
• Intuition relies on holistic associations, is affectively charged - engaging the emotions, and although not rational, it is not wrong or in opposition to rational analysis
• We often make decisions based on perceptions (not fact)
• Overconfidence Bias


  Believing too much in our own ability to make good decisions - especially when outside of own expertise
• Dunning-Kruger Effect


  The weaker the ability, the more likely to overestimate performance/ability
• Confirmation Bias


  Selecting and using only facts that support our decision
• Availability Bias


  Emphasizing information that is most readily at hand
• Randomness Error


  The tendency to believe that we can predict the outcome of random events
• Risk Aversion


  We prefer a sure thing over a risky outcome
• Sunk Cost Fallacy


  A cost that has already been paid and thus cannot be recovered is called sunk cost, and the tendency to persist in an activity because of previously invested effort, time or money
• Irrational Escalation of Commitment

  Increasing commitment to a decision in spite of evidence that it is wrong, especially if responsible for the decision
• Anchoring Bias


  Using early, first received information as the basis for making subsequent judgments
• Framing


  The tendency of people to underestimate the duration of time to complete a specific task or project
• Hindsight Bias


  The tendency to believe we could accurately predict the outcome, after the outcome of the event is known
• Focusing on goals, looking for disconfirming information, not creating meaning, and increasing options can help address decision-making biases
• Bringing it all together - Thinking Fast and Slow