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TEST BANK For Judgment in Managerial Decision Making, 8th Edition Max H. Bazerman Don A. Moore| Verified Chapters | Complete
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Judgment in Managerial Decision Making, 8th Edition Max H. Bazerman Don A. Moore
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Judgment in Managerial Decision Making, 8th Edition Max H. Bazerman Don A. Moore
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Human decision making Lecture 1Psychologists focus more on individual behavior and make theories for deviations instead of ignoring them.
When economics and psychology work together you get better theories that predict peoples behavior better.
Economics: Exactly wrong
vs. Psychology: vaguely right
Assumptions of economic theory:
- Complete information.
This is never true
- Correct calculation of utility
people are assumed to be able to integrate information into utility.
Answer: people are not rational, but act rationally.
Answer: Irrational agents will become extinct. (not true, stock market)
- Individualism, self interest
Assumes that people mainly focus on what's in it for themselves. Does not take into account that people care
about fairness and sometimes care more for the interest of others.
Answer: Aggregate behavior is more rational (not true, systematic deviations)
- Knowledge about short-term, and long-term utility
Too difficult to know and think about. Unhealthy food.
- Stable preferences
We do not like the same things all the time and preferences also change based on context.
Answer: it will even out in the long run (not true, systematic deviations)
- Maximisation of utility
We do not always try to make a good decision. Cause making a good decision takes time and effort
Answer: if it is about big money, people get serious.
- No role for emotion
Chapter 1: Introduction to managerial decision making
6 steps in rational decision making:
Assumptions that prescribe how a decision should be made, not how a decision is made.
1. Define the problem
2. Identify criteria
3. Weight criteria
4. Generate alternatives
5. Rate each alternative on each criterion
6. Compute the optimal decision
Cognitive functioning
System 1:
- Intuitive system
- Fast, automatic, effortless, implicit and emotional
- Errors and biases can occur
System 2:
- Reasoning
- Slow, conscious, effortful explicit and logical
Two schools of thought:
- Prescriptive models: optimal decision making
- Descriptive models: consider how decisions are actually made → book uses this approach because:
1. Understanding our decisions will help to clarify where we are likely to make mistakes
2. Optimal situations depend on the behaviour of others → understanding the reaction of others is critical
when making a decision
3. People don’t understand how they make decisions + do not want to improve
Bounded rationality (why we satisfice):
- People do not have the time and money to get access to all the information needed to make a decision
- Intelligence limitations and perceptual errors limit decision making
,Heuristics: simplifying strategies, rules of thumb, serve as a mechanism for coping with the complex environment
surrounding our decisions.
Richard Thaler:
1. Bounded willpower (greater weight on present concerns than future concerns → temporary motivations are
inconsistent)
2. Bounded self-interest: we care about the outcome of others
1. The availability heuristic
Assessing the frequency, probability, or likely causes of an event by the degree to which instances or occurrences of
that event are readily availble in memory.
2. The representativeness heuristic
People tend to look for traits the individual may have that correspond with previously formed stereotypes.
3. The confirmation heuristic
Our focus on selective data or a single possible cause of an effect neglect alternative causes of the effect and
conclude that the association between the single cause and effect that we are considering is stronger than it is in
reality. → leads to confirmation bias (interpret in a way that supports our conclusions), anchoring (irrelevant initial
hypothesis holds over our judgement), hindsight bias (dismiss too quickly that things could have turned out
differently).
4. The affect heuristic (system 1)
Likely to be used when people are busy and under time constraints. Emotions, moods and weather can play a big
role.
Article 1; Weber; Mindful Judgment and Decision Making
Summary
Preferences: Preferences involve value judgments and are therefore subjective, such as deciding how much to
charge for an item on eBay. In economics, inferred from choices and assumed to reflect utilities. In psychology,
thought is constructed in order to make a choice.
Inference: Inferences are about beliefs, such as the judged likelihood that a political candidate will win the next
election, and typically have objectively verifiable answers. Decision makers’ judgments about the world using logic
and often imperfect and uncertain information.
Lecture 2 Framing and Reference effects
Decisions because:
- resources are limited
- to adjust to one's environment
- since they may have a large influence on both an individual's happiness and society.
Decision making process:
1. Gathering information
2. Evaluation
3. Action
4. Implementation
5. Evaluation
Losing is worse than winning is fun → steepness of the curve
The reflection effect: risk averse for winning and risk taking for losing. → captured by the curve of the graph.
Subjective Expected Utility = Utility x Subjective probability
Utility
● depends on reference point
● depends on frame (loss vs. gain)
● Increase or decrease is curvilinear
Subjective probability
, ● People overestimate small probabilities
● People underestimate large probabilities
● People have a strong preference for certainty.
Maximax: a greatest positive outcome
Maximin: greatest (least negative) negative outcome
Minimax: the least difference between the outcome
Default bias: people want to be the standard so it is important what the default is. People do not like to change an
existing situation. The default is seen as an implicit recommendation and other people see this as the best option.
, Chapter 2. Overconfidence
Overconfidence causes a lot of trouble and can be seen as a very frequent occurring bias. Overconfidence causes
people to draw their bull’s-eyes too small, their confidence interval too narrow, and don’t shift their actions as much as
they should in the face of uncertainty. It is studied in three ways:
1. Overprecision: too sure about your judgement (confidence interval too narrow)
Causes of overprecision:
1. Overconfidence springs from the desire to relieve internal dissonance, even if this requires them to change what
they believe → resolving internal dissonance: giving more estimates about the same quantity → creates ‘’wisdom of
crowds’’
2. Our outward expression of confidence help others feel sure about us (even if we at the end were wrong)
3. Overprecision may be a byproduct of other cognitive processes. We tend to search for supportive rather than
contradictory evidence unconsciousness.
Consequences of overprecision:
We give substantially less weight to others’ advice, including very useful advice than to our own opinions, and our
accuracy suffers as a result.
2. Overestimation: overestimating how much we will accomplish in a limited amount of time. (we think we are
too smart, capable, fast).
Self-enhancement: liking our own characteristics (mostly unconsiousnous, when using system 2 these preferences
disappear). We evaluate ourselves more positively on more desirable traits than undesirable traits (because we strive
to enact desirable traits).
The illusion of control: when having very little control → people tend to think they have control. When having a great
deal of control → people underestimate that.
The planning fallacy: overestimate the speed at which we will complete projects and tasks (construction of
buildings).
Optimistic biases: the tendency to overestimate the rosiness of our future
3. Overplacement: occurs on easy tasks. Falsely think we rank higher than others.
Consequences: we believe we are more deserving than others → we fight too hard and hold out too long. Most people
see themselves better than average. We regularly neglect the reference group and fail to appreciate that we will be
among a select group of others who, like us, thought they were better than others.
Underplacement: occurs on difficult tasks. We believe we are more likely than others to experience common events
but less likely than others to experience rare events.
Positive illusions are likely to have a negative impact on learning and on the quality of decision making, personel
decisions, and responses to crises. People act in a arrogant, careless, and self-centred way.
You should try to match your private beliefs to reality.
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