Decision Making Decision Making

							Decision Making




 http://blog.potterzot.com/wp-content/uploads/2007/09/decision-making.jpg
Important aspects of decision making
Basic concepts of probability
   Probability
     0 (no probability) – 1 (definitely will happen)


     Most people overestimate
Basic concepts of probability
   Probability
Phases of decision making




                               Rationality
Cognitive illusions
 Heuristics

   Ex. “take the best”




 Biases (Cognitive Illusions)
Cognitive illusions
 Availability
Cognitive illusions

 Representativeness




   Conjunction fallacy
     Linda is a bank teller.
     Linda is a bank teller and is active in the feminist movement.
Cognitive illusions

 Representativeness

     Law of small numbers
       Gambler’s Fallacy



         “hot hand”


         “man who” arguments




                                http://www.lincolnshirecoastalcasino.co.uk/_media/_images/roulette_wheel.jpg
Cognitive illusions

 Framing Effect
Cognitive illusions
 Anchoring



    8x7x6x5x4x3x2x1   1x2x3x4x5x6x7x8
Cognitive illusions
 Sunk Cost Effects
Cognitive illusions
 Illusory Correlation




                                  Not under
                   Under stress    stress
 Hair-twister            20          10
 Not a hair-
                         80          40
 twister
Cognitive illusions

 Hindsight Bias
COGNITIVE ILLUSIONS
 Confirmation Bias
COGNITIVE ILLUSIONS

 Overconfidence
   Questionnaire examples
     What magazine had the largest circulation in 1978?
         A) Time        B) Reader’s Digest

     Who began the profession of nursing?
         A) Nightingale B) Barton
COGNITIVE ILLUSIONS
   Overconfidence




Example of a calibration curve.
Types of Decision models
 Normative models




 Prescriptive models




 Descriptive models
UTILITY MODELS


   Expected Utility Theory

                      Lottery A
           #1 = 10% of winning $10
          # 2-4 = 10% of winning $5
              # 5-10 = no money

           (.1 X $10) + (.3 X $5) + (.6 X $0) + $1.60
    UTILITY MODELS


       Expected Utility Theory


                Lottery A                                     Lottery B
    #1 = 10% of winning $10                      #1 = 10% of winning $100
   # 2-4 = 10% of winning $5                     # 2-4 = 10% of winning $1
         # 5-10 = no money                            # 5-10 = no money


(.1 X $10) + (.3 X $5) + (.6 X $0) + $1.60   (.1 X $100) + (.3 X $1) + (.6 X $0) + $10.30
Descriptive Models
 Recognition-Primed Decision Making
What are some ways to avoid poor decisions?


 Be wary of over-confidence


 Intuition vs. equations/computers