Decision Making How do people make decisions? Are there differences between making simple decisions vs. complex ones?

Classical Decision Theory Based on the idea of the rational actor or economic man –People are always fully informed about all of their options. –They are always fully informed about the consequences of each of those options. –They are fully sensitive to every distinction between their options –They always make completely rational decisions.

Problems with Economic Man Do people really have the resources to be this thorough? Are people really that rational about even many of their decisions, much less all of them? Do we only take into account the raw economic impacts of our decisions?

Subjective Expected Utility Theory Still assumes that people are largely rational in their decision making. However, it takes into account people’s evaluations of the “pleasure” (positive utility) or “pain” (negative utility) a given decision will engender. Decisions are still rational, but are based on our subjective judgments of the utility (+ and -) of a decision.

Problems with SEUT Allows for choices based on people’s preferences. Still requires a high degree of rationality on the part of the decision maker. Still requires a high degree of thoroughness in evaluating options.

Satisficing Simon (1957) claimed what might seem obvious - people (and industries) do not have the time, energy, and resources to consider all possible options. Simon theorized that people have bounded rationality. We evaluate our options until we find something that is “good enough.”

What do we mean by “good enough”? Evaluating a decision involves attempting to evaluating a number of different variables. When we start out, we want to make a decision that maximizes the value of all of the variables. Eventually, the cost of continuing to spend time and resources searching begins to outweigh the expected benefits of maximizing all the variables.

Elimination by aspects Following up on satisficing, Tversky theorized that we use a decision making process where we choose one aspect (variable) and eliminate all options that don’t meet a minimum criterion. Then we pick another aspect….. Etc.

Influences on our evaluations Availability heuristic: We judge the likelihood of an event or outcome based on how readily we can think of similar examples. Representativeness: We judge the likelihood of an outcome based on how much we believe the outcome represents underlying truths about the world. –Ex: Gambler’s fallacy; regression fallacy; conjunction fallacy