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

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

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

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

5. What is a Rational Decision?

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

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

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

9. 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.

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

11. Biases in Decision Making

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

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

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

15. 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.

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

17. System 1 System 2

18. Fixing Our Decision Making

19. 4.25%  99.98%

20. 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)

21. Appendix A: Problem 1 6. Pulitzer prizes won by faculty and alumni of Boston University (2013) 7. 2012-2013 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

22. Appendix A: Problem 1 1.1636 6. 22 2.19.4 billion7. 6.007 billion 3.1,438.58. 1,423 4.71 9. 6,510 5.8,425 10. 52

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

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

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

26. Photo Attribution Slide 1 Photo Credit: koocbor https://www.flickr.com/photos/30451996@N00/4420042160/ https://creativecommons.org/licenses/by-sa/2.0/ Slide 3 Photo Credit: The Shopping Sherpa https://www.flickr.com/photos/49333775@N00/5366688138/ https://creativecommons.org/licenses/by-nd/2.0/ Slide 5 Photo Credit: T|ng~ https://www.flickr.com/photos/14770238@N07/2046402311/ https://creativecommons.org/licenses/by-nc-nd/2.0 Slide 6 Photo Credit: jcf https://www.flickr.com/photos/51035709780@N01/2467667896/ https://creativecommons.org/licenses/by-sa/2.0/ Slide 8 Photo Credit: Kimli https://www.flickr.com/photos/36606530@N00/3072707268/ https://creativecommons.org/licenses/by-nc/2.0/ Slide 10 Photo Credit: Old Shoe Woman https://www.flickr.com/photos/83955435@N00/6023886/ https://creativecommons.org/licenses/by-nc-sa/2.0/ Slide 11 Photo Credit: emilykbecker https://www.flickr.com/photos/emilykbecker/5829019719 https://creativecommons.org/licenses/by-nc-nd/2.0/ Slide 13 Photo Credit: Charles H. Bennett http://commons.wikimedia.org/wiki/File:The_Ant_and_the_Grasshopper_by_Charles_H._Bennett.jpg http://commons.wikimedia.org/wiki/Public_domain Slide 15 Photo Credit: Suzi Edwards-Alexander https://www.flickr.com/photos/8810771@N07/3141342119/ https://creativecommons.org/licenses/by-nc-nd/2.0/ Slide 17 Photo Credit: Martin Whitmore https://www.flickr.com/photos/rustychainsaw/3064090492/in/photostream/ https://creativecommons.org/licenses/by-nc-sa/2.0/ Slide 18 Photo Credit: zampano!!! https://www.flickr.com/photos/20875074@N00/268351934/ https://creativecommons.org/licenses/by-nc-nd/2.0/