2. Chapter 11 Thinking (II) Decision Making and Creative Thinking

4. Classical Decision Theory Devised by economists, statisticians, and philosophers early assumed that decision makers are 1. Fully informed regarding all possible options for their decisions and of all possible outcomes of their decision options 2. Infinitely sensitive to the subtle distinctions among decision options 3. Fully rational in regard to their choice of options

5.  Infinite sensitivity means that people can evaluate the difference between two outcomes, no matter how subtle the distinctions among options may be  Rationality means that people make their choices so as to maximize something of value, whatever that something may be

6.  Company A have a 50% chance of getting a 20% salary increase the first year  Company B have a 90% chance of getting a 10% salary increase the first year 0.50×0.20=0. 1 0.90×0.10=0.09 assuming all others are equal, we should choose company A

7. Subjective expected utility theory  The goal of human action is to seek pleasure and avoid pain. So when we make decisions, people will seek to maximize pleasured (referred to as positive utility) and to avoid pain (referred to as negative utility)  Each of us uses calculations of both subjective utility and subjective probability

8. The belief that people seek to reach well-reasoned decisions based on 1. Consideration of all possible known alternatives 2. Use of maximum amount of available information 3. Careful, if subjective, weighing of the potential cost (risk) and benefits of each alternative 4. Careful (although subjective) calculation of the probability of various outcomes 5. A maximum degree of sound reasoning, based on considering all of the aforementioned factors

9. Estimating Probabilities  Utility: A subjective measure of value  Expected value: The total benefit to be expected if a decisions were to be repeated several times  Example:

10. In fact  We humans do not always make ideal decisions, and we usually include subjective consideration in our decisions.  We humans are not entirely and boundlessly rational in making decisions.

11. Psychologists’ findings  Satisficing bounded rationality — we are rational, but within limits (Herbert Simon,1957)  Elimination by aspects : we focus on one aspect (attribute) of various options, and we form a minimum criterion for that aspect …… then select a second aspect …… until a single options remains (Dawes, 2000)

13. Heuristics and Biases  The anchoring heuristic — once people have established the starting point, their adjustment to it tend to be too small in bargaining situations, first impression  The representativeness heuristic Studies of Daniel Kahneman and Amos Tversky (1972): birth orderbirth order  Another reason we often use the ~ is that we mistakenly believe that small samples resemble in all respects the whole population from which the sample is drawn. Stereotype  Be highly aware of anecdotal evidence —” man-who ”  The concept of base rates……

14. Risk of death from various causes in the United States, 2001

15.  Availability heuristic accidents estimation, household chores  Overconfidence  Framing decisions example on p.382  Belief perseverance

16. The Fear Factor—Do We Fear the Right Things?  We fear what our ancestral history  We fear what we cannot control  We fear what is immediate  We fear what is most readily available in memory

17. Game Theory  John Nash  Prisoners ’ Dilemma  Lover ’ s game …

18. Creativity: the ability to produce novel and valuable ideas  Divergent thinking 1. Fluency 2. Flexibility 3. Originality  Test ( Unusual Uses Test, Consequences Test … )

19. Stages in creative thinking 1. Orientation 2. Preparation 3. Incubation — simply put the problem aside for a while — offers one way in which to minimize negative transfer Incubation 4. Illumination 5. verification

20. Enhancing Creativity——Brainstorms 1. Define the problem broadly 2. Create the right atmosphere 3. Allow time for incubation 4. Seek varied input 5. Look for analogies 6. ……