8 modules from the course Behavioural Management Science.
Included video's, pictures and lectures from course year 2023.
Course given at Erasmus University Rotterdam. Name of study Bedrijfskunde.
A rational decision the steps
1. define the problem
2. identify all decision criteria
3. allocate weights to the criteria
4. identify all alternatives = look to all the tables
5. evaluate the alternatives
6. choose the best alternatives
How humans decide? - Beyond rational choice
Bounded rationality
• resources (time, cognitive etc) are limited. We often don’t optimize, but satisfice (e.g.
consider only few alternatives). Fail to choice the best option because we have not
enough resources. (Simon)
Predictable irrationality
• We are not just often wrong. We are systematically wrong (biased). That means we
can study how we can decide (Tversky / Kahneman). We can predict how people are
wrong in their choices. How can we improve our decisions.
A bat and a ball cost €1,10 in total. The bat cost €1,- more then the ball. How much does the
Ball Costs?
• 10 cent is not the correct answer but it’s the answer that came first in your mind. =
automatically in your mind but have to correct yourself. = system 1.
How people tend to make decisions:
System 1: automatic, fast, not cognitively demanding. = 10 cent of example.
• Intuitive answer.
System 2: controlled, slow, cognitively demanding.
• is the intuitive answer correct? = Rational answer = hopefully the correct answer.
• The correct answer is 5 cent.
Heuristics and biases
• System 1: tend to be responsible for heuristics. = mental shortcuts to satisfactory
solutions. Why are the heuristics useful?
, • Mental shortcuts are efficient = no resources are required. Most of the times they
work.
• But when they don’t work they lead to biases. Systematic deviations for rationality.
(Systematic = predictable. Most people who don’t say 5 cent tend to say 10 cents)
wrong place is predictable.
Two notes of caution
1. What is rational? Is debated question
2. Not all the biases are due to heuristics / system 1
- Video 1.2 heuristics in probability estimation: representativeness
Probability estimation:
- Example vacation probability is the location/weather okay?
- Restaurant / new beer / new guitar / new house / sports / writing papers.
How do we make these kind of judgments? What are some of the heuristics we use?
Representativeness Heuristic = shortcut
- When I see a bird that walks like a duck and swims like a duck and quacks like a duck,
I Call that bird a Duck. = James Whitcomb Riley
- The more X resembles Y, the more likely X is to be Y.
- Problem: tends to ignore some information that might be relevant. Fail to ask yourself:
1. How confident are you in this resemblance?
◼ Stereotypes might be accurate are still stereotypes.
◼ We underestimate the importance of information. Information is often, not
enough.
2. How likely is Y in the first place?
◼ Representativeness ignores base rates.
◼ False positives
Video 1.3 heuristics in probability estimation: availability
Availability Heuristic: The more example of X come to mind, the more likely X is.
But what make examples easier to recall?
- Familiarity = how likely X is, you think X is more likely because your familiar with
it.
- Recency = How recent was something.
- Salience = less likely to die in airplane then in a car.
,Video 1.4 more bias
Anchoring and (insufficient) adjustment = not really a heuristic.
Example: How many African countries there are in the United Nations?
- Do you think there are more or less then 65 African countries in the UN? = 45 times
- Do you think there are more or less then 10 African countries in the UN? = 25 times
Presenting a higher or lower number/anchore first let people sit around that number.
Choice context matter:
1. Attraction Effect
Introducing a third option make people more attractive to the other two options.
2. Compromise Effect
Compromise option, option who is the compromise is now more attractive.
Two readings:
Tversky, A., & Kahneman, D. (1974). Judgment under uncertainty: Heuristics and
biases. Science, 185(4157), 1124-
1131. https://www.dropbox.com/s/jq8td2izdqz6l87/1a.%20tversky%20kahneman%201974.pd
f?dl=1
Dhar, R., & Gorlin, M. (2013). A dual‐system framework to understand preference
construction processes in choice. Journal of Consumer Psychology, 23(4), 528-
542. https://www.dropbox.com/s/msnf4ohmxrvjx9b/1b.%20dhar%20gorlin%202013.pdf?dl=
1
, Lecture 1 – 21 februari ’23
Human are not rational
Survey:
=C
2. Biases Occur: C not necessarily because of heuristics
biases tend to get you in the wrong heuristic
biases = system matic error
3. Relying on the representativeness heuristic= B is more problematic if one has less
information about the resemblance (if you have not enough information more likely to get it
wrong.
4. C
5. C
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