RSM 260
DECISION
MAKING
Rachel Ruttan, PhD
VROOM RACING
•
If you have done this case before, or heard about the case from
someone, please come see me immediately!
•
First, read the case and make an individual decision: Race or Don’t
race
•
Then, discuss with your group and make a GROUP decision
•
Your group can ask me an additional question about the case if
you need more information
P L E A S E TA K E T H I S Q U I C K S U R V E Y:
https://tinyurl.com/vroom260
The brain uses heuristics that may
distort the true value of options
In a lake, there is a patch of lily pads. Every day,
the patch doubles in size.
If it takes 48 days for the patch to cover the entire
lake, how long would it take for the patch to cover
half of the lake?
Blindspots in our decision-making
• 85% of people think they are “less biased than average” in
their decision-making
• 14% think they are average
• Only 1% believe that “more biased than average”
• Upshot: Even if we recognize the errors, we are optimistic
(and incorrect) about how often we catch them?
Bounded Rationality
Look for Confirmation (Confirmation Bias)
Irrelevant Anchors
Not looking at the full picture (Availability)
Deal Maker’s Curse
Status Quo Bias
Problem Framing
Overconfidence
Tunnel Vision (Escalation of Commitment)
Sunk Costs
A R AT I O N A L A N A LY S I S M O D E L
Identify the problem
Search for relevant information
Develop Alternatives
Evaluate the Alternatives
Choose Best Solution
Implement Chosen Solution
CHOOSING A SCHOOL
Culture
Rotman
Queen’s
UBC
Salary
Weather
Rigor
Total
CHOOSING A SCHOOL
Decision
Weights
Rotman
Queen’s
UBC
.3
.2
.1
.4
Culture
Salary
Weather
Rigor
Total
CHOOSING A SCHOOL
Decision
Weights
.3
.2
.1
.4
Culture
Salary
Weather
Rigor
Rotman
7
8
5
10
Queen’s
9
9
5
6
UBC
8
7
7
6
Total
CHOOSING A SCHOOL
Decision
Weights
.3
.2
.1
.4
Culture
Salary
Weather
Rigor
Total
Rotman
7
8
5
10
8.2
Queen’s
9
9
5
6
7.2
UBC
8
7
7
6
6.9
L I M I T S O F R AT I O N A L A N A LY S I S
• Bound by uncertainty and ambiguity
• Rational analysis model requires complete
information
• Very often we simply don’t have that much
information
• Bound by the imperfections of the mind
• Limited by systematic biases that alter the way we
• Gather
• Process
• Evaluate information
Bounded rationality
• People try to act rationally, but they are
limited in their capacity to acquire and
process information.
• There are bounds on people’s rational
behavior
Looking for Confirmation
• We seek out information that proves us right
•
Occurs when we have preconceived ideas about what the best or
“right” option is … and we almost always do!
Failure of Eye-witness testimony
Self-fulfilling Prophecy
Science (Replication Crisis)
Promotion Decisions
How to request disconfirming information
• Bad: What do you think of the proposal?
• Good: What’s the biggest obstacle to this plan?
• BEST: If I failed, why do you think it would be?
“I take it we are all in complete agreement? Then I suggest we postpone
discussion to give ourselves time to develop disagreement and perhaps
gain some understanding of what this decision is about”
- Alfred Sloan, CEO General Motors
Irrelevant Anchors
CONTEXT MATTERS
10% Off - Sale
No Limit
Limit 12 Per
Customer
3.5 cans per customer
7 cans per customer
Experts also anchor their judgments
Apparent Listed Price
(Anchor)
Appraised Value
Recommended Selling
Price
Reasonable Purchase
Price
Apparent Listed Price
(Anchor)
Appraised Value
Recommended Selling Reasonable Purchase
Price
Price
$129,900
$114,204
$117,745
$111,454
$139,900
$125,041
$128,530
$124,653
$149,900
$128,754
$130,981
$127,318
$129,900
$139,900
$149,900
Northcraft and Neale, 1987
Do Credit Cards use Anchoring?
(Stewart, 2009)
• Minimum Payment: For partial payments, there
is a .75 correlation between the minimum
payment and the amount paid
• If minimum payment is removed, payments
rise by 70%.
In group decision-making, group can get
strongly anchored on initial proposals
Not looking at the full picture
• We only consider the information that “jumps” to mind
All relevant information
What is “top of mind”
What we use to make our decision
Which of the following causes more deaths in the
U.S. each year, Homicide or Alzheimer’s?
Your answer: 52% Homicide, 48% Alzheimer’s
Reality: Homicide: 26,000
Alzheimer’s: 122,000
Availability Heuristic
• Things that are easy to “picture” are overestimated
and sometimes evaluated more extremely
• Things that are hard to picture are underestimated
and sometimes evaluated less extremely
Deal Maker’s Curse
• The desire to “win” a deal that ultimately results in a losing proposition
for the company as too high a price is paid
• Defined according to the outcomes: You pay more than its worth
Bounded Rationality
Look for Confirmation (Confirmation Bias)
Irrelevant Anchors
Not looking at the full picture (Availability)
Deal Maker’s Curse
Status Quo Bias
Problem Framing
Overconfidence
Tunnel Vision (Escalation of Commitment)
Sunk Costs
Status Quo Bias
• We have a strong bias to stick with the status quo even if there are severe
disadvantages to doing so
• An employee has a better opportunity to join a different department at
her company, but she rejects the opportunity.
• A hiring manager interviews several candidates who all have similar
experience and personalities as current employees. Unconsciously, the
hiring manager is favoring candidates that are less likely to disrupt the
status quo of the company.
Status Quo Bias
Problem Framing
• The vast majority of decisions are framed as “this or that”
decisions
• A “pros vs. cons” analysis of two options
• Whether or not to take the job
• Whether or not to ask for a raise
Claireabelle: Breakup or not?
I don’t know what to do. Every time I go to my boyfriend’s house or
hang out with his family, I feel like I’m constantly being judged. His
sister is very mood-swingy towards me. His older brother hates me.
His mom is rude to me. What do I do? I like him, but I’m tired of
being judged and feeling weird when I’m with him.
ASK.COM
Shalie333: As long as he is not treating you this way, then
I wouldn’t break up with him.
ASK.COM
Eimis74523: Don’t talk nonsense. If he loves you he
should stand up for you. If my family would do this to my
gf, I would tell them to go {bleep} themselves.
ASK.COM
Yolo1212: Do whatever feels right.
ASK.COM
14sweetie: Breaking up isn’t the answer if he treats you good.
ASK.COM
Kuckleburg: …RUN...RUN FAST. This family is creepy.
What is Claireabelle’s ideal outcome?
Forget about the current options and only think about
the ideal scenario — see if you can create a new option
to achieve that. If not, pick the option that comes closest
Overconfidence
Walmart 2003 revenue = $41 billion
Median Age of Canadians = 41
Accuracy
Number of endangered Species = 16,000
Confidence
For the following questions, please rate yourself in
comparison to the other students in this class. For
each item, please indicate (in the space provided) the
percentile to describe your position relative to your
classmates.
•
Decision-making abilities (65%)
•
Decision-making abilities (65%)
•
Bargaining abilities (58%)
•
Bargaining abilities (78%)
•
Intelligence (66%)
•
Intelligence (66%)
•
Driving abilities (53%)
•
Driving abilities (67%)
•
Health (65%)
•
Health (63%)
•
Physical attractiveness (59%)
•
Physical attractiveness (70%)
•
Number of good friends (50%)
•
Number of good friends (60%)
Solution: Practice reasonable humility!!
Tunnel Vision
Sunk Costs
– People hate to “close at a loss”
– Leads to throwing good money after bad
E S C A L AT I O N O F C O M M I T M E N T
• Investing more resources (time, money, social capital) in the hope of
overturning initial failures
•
With each new investment, commitment to a good outcome grows
Examples:
• Continuing to repair a car that would be cheaper to replace
• Paying for storage on furniture that doesn’t fit your new place
• Continuing to work on a so-so idea when it would be faster to start over
SOLUTIONS
• Establish concrete criteria for success
• Create an action plan with benchmarks
• Make it public and stick to it
• Progress incrementally
• Enforce stopping rules
• Seek out and listen to the views of people who were
uninvolved in the earlier decisions / diverse points of view
• Check overconfidence
• Create an exit strategy before beginning