This is a summary of the book Judgement in managerial decision making. This is literature for the subject Human decision making (UEC31306) at the Wageningen University in the second year of management and consumer studies (bedrijfs- en consumentenwetenschappen).
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Judgement in managerial decision making
Max H. Bazerman & Don A. Moore
8th edition
Wageningen University
2021
UEC31306 – Human Decision Making
At the end of this summary there is an overview of all the
chapters and subjects
NB. In this book a lot of examples are mentioned to explain the theories and concepts. In this summary you
find very short descriptions of those examples just to remind you what it was about, not to actually explain
the whole example.
, Chapter one – Introduction to managerial decision making
“Judgement” refers to the cognitive aspect of decision-making. Decisions can only be
made when there are alternatives for a solution.
The rational model of decision-making
1. Define the problem: accurate judgement is necessary to identify and define the
problem correctly
2. Identify the criteria
3. Weigh the criteria: criteria vary in importance
4. Generate alternatives: identify possible courses in action. An optimal search end
when the value of the added information exceeds the costs of the search
5. Rate each alternative on each criterion: requires to forecast future events
6. Compute optimal decision: multiply ratings with weighs, adding up weighted
ratings per alternative and choose the best one
System 1 and system 2 thinking
People do not always follow logic reasoning, and follow the rational model as described
above.
System 1 is intuitive thinking. It is fast, automatic, implicit, effortless and emotional.
This system is sufficient and used in most situations, especially when one is busy.
System 2 is the reasoning system. It is slower, conscious, effortful, explicit and logical.
These two systems frequently work together. Most of the errors and biases happen in
system 1 thinking.
The bounds of human attention and rationality
Rationality refers to the decision-making process that is logically expected to lead to the
optimal result. Herbert Simon suggested that individual judgement is bounded in its
rationality. The field of decision-making is divided into two models.
- Prescriptive models are methods for making optimal decisions
- Descriptive models are looking at how decisions are actually made
This book takes a descriptive approach, because it wants to explain why and how
individuals make choices and how to make people make better decisions.
The ability to calculate the optimal choice is limited because of a lack of important
information, time and costs constraints, and the intelligence limitations and perceptual
errors. We satisfice, we search until we find a satisfactory solution that will suffice.
Individuals rely on simplifying strategies when making decisions. These are called
heuristics. They cope with the complex environment of decisions.
Richard Thaler found that decision making is bounded by our willpower, we find the
present more important than the future, and by our self-interest, we care about the
outcome for others. The authors of this book added two bounds to this, which are
bounded awareness and bounded ethicality.
Heuristics
Heuristics are often used because the time saved is more important than the costs of
any potential reduction in the quality of the decision. But, when heuristics are applied
wrongly, they can lead to wrong decisions. There are four general heuristics.
,The availability heuristic
People asses the frequency, probability or likely causes of an event by the degree to
which instances or occurrences of that event are available in the memory. An event that
evokes emotion is easier to recall and will be more available than events without
emotions.
The representativeness heuristic
People judge based on features of the person, event or object that are similar to a
certain stereotype or category. The person, event or object then represents that
category. This heuristic could lead one to the best option, but also cause serious errors.
Even if representative information is insufficient people tend to rely on it. This could
also happen unconsciously.
The confirmation heuristic
People’s tendency to select data of point out a single cause of an effect can lead to a
stronger association between effect and cause than in reality. People will confirm a
statement, which could be a wrong conclusion, when contrary evidence is absent. This
heuristic can lead to confirmation bias, anchoring or hindsight bias.
The affect heuristic
People’s judgement is often based on affective evaluations that are mostly unconscious,
rather than rational analyses. System 1 thinking is activated when one is busy or under
time constraint.
Yet Lewin suggests that for change in decision-making 1) one must unfreeze existing
decision-making, 2) information to promote change must be provided, and 3) new
processes must be refreezed. This book will deal with all these steps.
, Chapter two – Overconfidence
Overconfidence may be the mother of all biases because it facilitates many other biases
(people are too confident about themselves and their judgements) and its effects are
wide. Overconfidence has been the cause of many catastrophes. It is divided in
- Overprecision: the tendency to be too sure about judgements and not check if
they are correct
- Overestimation: the tendency to think we are more and can do more than in
reality
- Overplacement: the tendency to rank ourselves higher than others.
Overprecision
Even in areas of their expertise, people are still overconfident. They narrow their
confidence interval. This leads to the same accuracy of people who are not an expert
and set their confident interval wider. However, people usually do not choose a
confidence interval, but rather base their action on the uncertainty of their accuracy and
on the consequences of falling short or exceeding. But in choosing this action, they often
do not shift their behavior as much as they should, because they underestimate the
uncertainties involved.
People are usually too narrow in setting confidence intervals. The real value is often not
included in this interval. Even scientists of highly skilled people make the mistake of
overprecision.
Causes of overprecision
Overprecision results from the desire to relieve internal dissonance. The tension
about having to make a choice may lead people to change what they believe in order to
relieve the tension. Another way to resolve this internal dissonance is called “wisdom
of the crowds”. Giving several estimates and average that, will make the estimation
more accurate.
Another reason for overprecision is the trust, credibility and status one can earn by
expressing confidence. Confident people appear more persuasive and capable. But one
must pay attention, because when they turn out to be wrong, their confidence backfires.
Also, the mind is better at searching confirmatory evidence than contradictory evidence.
This leads to an overestimation of our knowledge and skills, which results in
overprecision.
Research has shown that explicitly considering alternatives, increases the accuracy of
one’s judgement.
Consequences of overprecision
If people’s faith in their own knowledge and skill were well calibrated, they should
weigh other’s knowledge equally with their own. However, people give substantially
less weight to other’s opinions and advice than to their own, and their accuracy suffers
from it. The term naïve realism describes the belief that the way we see the world is
the only sensible view. It takes effort to move from our familiar and comfortable view to
another’s view that is unfamiliar. The unwillingness to do this constraint the possibility
of mutual understanding and agreement.
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