Judgment and Decision Making
[Instructor Name]
[Class and Section Number]
Overview
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•
•
•
•
Introduction
What is a Rational Decision?
Biases in Decision Making
Contemporary Developments
Fixing Our Decision Making
Introduction
Bounded Rationality –
Cognitive limitations
prevent humans from
being fully rational
Biases – Mistakes that
influence judgment
Overview
•
•
•
•
•
Introduction
What is a Rational Decision?
Biases in Decision Making
Contemporary Developments
Fixing Our Decision Making
What is a Rational Decision?
What is a Rational Decision?
Rational Decision Making
 Define the problem
 Identify criteria necessary
to judge
 Weigh the criteria
 Generate alternatives
 Rate each alternative
 Compute optimal decision
Overview
•
•
•
•
•
Introduction
What is a Rational Decision?
Biases in Decision Making
Contemporary Developments
Fixing Our Decision Making
Biases: Overconfidence
Overconfidence - The bias to have greater
confidence in your judgment than is warranted
based on a rational assessment.
Biases: Anchoring
Anchoring – The bias to be affected by an initial
anchor, even if the anchor is arbitrary, and to
insufficiently adjust our judgments away from it.
10 – 100 – 200?
The size of your anchor does matter.
Biases: Framing
Framing - The bias to be systematically affected
by the way in which information is presented.
 Positive or negative?
 Influence of frame
Biases in Decision Making
Overview
•
•
•
•
•
Introduction
What is a Rational Decision?
Biases in Decision Making
Contemporary Developments
Fixing Our Decision Making
Contemporary Developments
Bounded Willpower –
We give greater weight to
present concerns over
future ones.
Contemporary Developments
Bounded Self-interest – Our own behavior is
influenced because we care about the outcomes
of others.
Contemporary Developments
Bounded Ethicality – Our
ethics are limited in ways
that we don’t realize.
Bounded Awareness –
There is a broad array of
focusing failures that
affect our judgments.
Overview
•
•
•
•
•
Introduction
What is a Rational Decision?
Biases in Decision Making
Contemporary Developments
Fixing Our Decision Making
Fixing Our Decision Making
System 1
System 2
Fixing Our Decision Making
Fixing Our Decision Making
4.25%  99.98%
Appendix A: Problem 1
1.
2.
3.
4.
Year Harvard was founded
Value of Yale University’s endowment (2010)
# of acres of housing at UT (2013)
Nobel prizes won by UC Berkley’s faculty,
alumni, and researchers (2013)
5. # of undergraduates at Northwestern Univ.
(2013)
Appendix A: Problem 1
6. Pulitzer prizes won by faculty and alumni of
Boston University (2013)
7. 2012-2013 annual budget for U PENN
8. # of academic staff members at Carnegie
Mellon University (2013)
9. # of postgraduate students at Massachusetts
Institute of Technology (2013)
10. # of colleges and universities in Boston area
Appendix A: Problem 1
1.
2.
3.
4.
5.
1636
19.4 billion
1,438.5
71
8,425
6.
7.
8.
9.
10.
22
6.007 billion
1,423
6,510
52
Appendix B: Problem 2
• > 10 in 1000 firms?
• _______ in 1,000 Big Four clients have
significant executive-level management fraud
Appendix C: Problem 3
• Program A
– 200 people saved
• Program B
– 1/3 probability  600 people saved
– 2/3 probability  0 saved
Appendix C: Problem 3
• Program C
– 400 people will die
• Program D
– 1/3 probability  600 people saved
– 2/3 probability  0 saved
Photo Attribution
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