# Decision Making Decision Making

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```							Decision Making

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

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