Decision Making

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Decision Making
http//blog.potterzot.com/wp-content/uploads/2007/
09/decision-making.jpg
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Important aspects of decision making
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Basic concepts of probability

• Probability
• 0 (no probability) 1 (definitely will happen)
• Most people overestimate

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Basic concepts of probability

• Probability

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Phases of decision making

• Rationality

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Cognitive illusions

• Heuristics
• Ex. take the best
• Biases (Cognitive Illusions)

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Cognitive illusions

• Availability

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Cognitive illusions

• Representativeness
• Conjunction fallacy
• Linda is a bank teller.
• Linda is a bank teller and is active in the
  feminist movement.

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Cognitive illusions

• Representativeness
• Law of small numbers
• Gamblers Fallacy
• hot hand
• man who arguments

http//www.lincolnshirecoastalcasino.co.uk/_media/
_images/roulette_wheel.jpg
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Cognitive illusions

• Framing Effect

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Cognitive illusions

• Anchoring

8x7x6x5x4x3x2x1 1x2x3x4x5x6x7x8
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Cognitive illusions

• Sunk Cost Effects

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Cognitive illusions

• Illusory Correlation

Under stress Not under stress
Hair-twister 20 10
Not a hair-twister 80 40
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Cognitive illusions

• Hindsight Bias

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Cognitive illusions

• Confirmation Bias

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Cognitive illusions

• Overconfidence
• Questionnaire examples
• What magazine had the largest circulation in
  1978?
• A) Time B) Readers Digest
• Who began the profession of nursing?
• A) Nightingale B) Barton

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Example of a calibration curve.
Cognitive illusions

• Overconfidence

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Types of Decision models

• Normative models
• Prescriptive models
• Descriptive models

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Utility models

• Expected Utility Theory

Lottery A 1 10 of winning 10 2-4 10 of
winning 5 5-10 no money
(.1 X 10) (.3 X 5) (.6 X 0) 1.60
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Utility models

• Expected Utility Theory

Lottery A 1 10 of winning 10 2-4 10 of
winning 5 5-10 no money
Lottery B 1 10 of winning 100 2-4 10 of
winning 1 5-10 no money
(.1 X 100) (.3 X 1) (.6 X 0) 10.30
(.1 X 10) (.3 X 5) (.6 X 0) 1.60
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Descriptive Models

• Recognition-Primed Decision Making

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What are some ways to avoid poor decisions?

• Be wary of over-confidence
• Intuition vs. equations/computers