Judgment and Decision Making [Instructor Name] [Class and Section Number]

Overview Introduction What is a Rational Decision? Biases in Decision Making Contemporary Developments Fixing Our Decision Making

Introduction Bounded Rationality – Cognitive limitations prevent humans from being fully rational Biases – Mistakes that influence judgment

Overview Introduction What is a Rational Decision? Biases in Decision Making Contemporary Developments Fixing Our Decision Making

What is a Rational Decision?

Rational Decision Making  Define the problem  Identify criteria necessary to judge  Weigh the criteria  Generate alternatives  Rate each alternative  Compute optimal decision

Overview Introduction What is a Rational Decision? Biases in Decision Making Contemporary Developments Fixing Our Decision Making

Biases: Overconfidence Overconfidence - The bias to have greater confidence in your judgment than is warranted based on a rational assessment.

Biases: Anchoring Anchoring – The bias to be affected by an initial anchor, even if the anchor is arbitrary, and to insufficiently adjust our judgments away from it. 10 – 100 – 200? The size of your anchor does matter.

Biases: Framing Framing - The bias to be systematically affected by the way in which information is presented.  Positive or negative?  Influence of frame

Biases in Decision Making

Overview Introduction What is a Rational Decision? Biases in Decision Making Contemporary Developments Fixing Our Decision Making

Contemporary Developments Bounded Willpower – We give greater weight to present concerns over future ones.

Contemporary Developments Bounded Self-interest – Our own behavior is influenced because we care about the outcomes of others.

Contemporary Developments Bounded Ethicality – Our ethics are limited in ways that we don’t realize. Bounded Awareness – There is a broad array of focusing failures that affect our judgments.

Overview Introduction What is a Rational Decision? Biases in Decision Making Contemporary Developments Fixing Our Decision Making

System 1 System 2

Fixing Our Decision Making

4.25%  99.98%

Appendix A: Problem 1 1.Year Harvard was founded 2.Value of Yale University’s endowment (2010) 3.# of acres of housing at UT (2013) 4.Nobel prizes won by UC Berkley’s faculty, alumni, and researchers (2013) 5.# of undergraduates at Northwestern Univ. (2013)

Appendix A: Problem 1 6. Pulitzer prizes won by faculty and alumni of Boston University (2013) annual budget for U PENN 8. # of academic staff members at Carnegie Mellon University (2013) 9. # of postgraduate students at Massachusetts Institute of Technology (2013) 10. # of colleges and universities in Boston area

Appendix A: Problem billion billion 3.1, , , ,

Appendix B: Problem 2 > 10 in 1000 firms? _______ in 1,000 Big Four clients have significant executive-level management fraud

Appendix C: Problem 3 Program A – 200 people saved Program B – 1/3 probability  600 people saved – 2/3 probability  0 saved

Appendix C: Problem 3 Program C – 400 people will die Program D – 1/3 probability  600 people saved – 2/3 probability  0 saved

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