Decision Making Lecture #5

Decision Making Your company moves into a new skyscraper. Employees complain about the long wait for elevators, especially at the start and the end of the work day. You are in charge. What do you do?

Elevator Problem

Decision Making Process Basic process Logical A good default system

Decision Making Process 1 Problem Identification 2 Develop Feasible Alternative Solutions 3 Evaluate Alternative Solutions 4 Choice and Implementation of Best Alternative

Classical Decision Making Approach Classical or Rational Approach Follows the assumptions of the “Rational Man” model from economics

Assumptions of Rationality People have clearly defined, stable criteria Preferences can change, but not randomly and continually

Assumptions of Rationality People have knowledge of all relevant alternatives They know every option available

Assumptions of Rationality People have the ability to evaluate all alternatives They have the knowledge or skill needed to understand the options

Assumptions of Rationality People have self-discipline enough to follow the system of evaluation They won’t stop until every option is analyzed

Behavioral Decision Making Approach Does not assume people are efficient machines

Bounded Rationality Assumes people have limits to their perceptual and calculative abilities

Satisficing Selecting the alternative that may not be optimal, but is good enough (Satisfy + Suffice = Satisfice)

Bad Decisions “The horse is here to stay, but the automobile is only a novelty—a fad” Bank president advising Henry Ford’s lawyer not to invest in Ford Motor Co. (1903)

Some Bank President The attorney ignored the advice, bought $5,000 worth of stock, and sold it several years later for $12.5 million

Bad Decisions “There is no reason for any individual to have a computer in their home” Kenneth Olsen, founder of Digital Equipment Corporation (DEC) (1977)

Bad Decisions “Who the hell wants to hear actors talk?” Harry M. Warner, Warner Bros. (1927)

Bad Decisions “We don’t like their sound. Groups of guitars are on the way out” Decca Records, rejecting the Beatles (1962)

Stooges

True love has stricken the boys! Crossbows at 50 feet. One (poisoned) arrow per Stooge

Stooges Curly Shoots First 20% accuracy

Stooges Larry Shoots Second 80% accuracy

Stooges Moe Shoots Third 100% accuracy

Stooges Curly wants to know: “Where do I shoot to maximize my chances of staying alive?”

Let’s Make a Deal! 12 3

Available Prizes $100 $100,000 8 x 10 autographed photo of Milli Vanilli (actually a photocopy of the picture)

Let’s Make a Deal! 12 3

Let’s Make a Deal What is the probability that the $100k is behind the selected door? 1/3 What is the probability that the $100k is not behind the selected door? 2/3 Why is it 2/3?

Let’s Make a Deal Because probabilities always have to add up to 1 1/3 + 2/3 = 3/3 = 1

Let’s Make a Deal 12 3

Let’s Make a Deal Do you want to switch doors?

Let’s Make a Deal What is the probability that the $100k is behind the selected door?

Let’s Make a Deal Marilyn vos Savant’s column in Parade Economic Perspectives journal Monty Hall article -- New York Times

Counter-Intuitive Problems Our intuition can be wrong Common sense can be wrong Common knowledge can be wrong