Decision Making

Lecture #5

Decision Making

Your company moves into a new skyscraper.

Employees complain about the long wait for elevators, especially at the start and the end of the work day.

You are in charge. What do you do?

Elevator Problem

Decision Making Process

Basic process

Logical

A good default system

Decision Making Process

1 Problem Identification

2 Develop Feasible Alternative Solutions

3 Evaluate Alternative Solutions

4 Choice and Implementation of Best

Alternative

Classical Decision Making Approach

Classical or Rational Approach

Follows the assumptions of the

“Rational Man” model from economics

Assumptions of Rationality

People have clearly defined, stable criteria

Preferences can change, but not randomly and continually

Assumptions of Rationality

People have knowledge of all relevant alternatives

They know every option available

Assumptions of Rationality

People have the ability to evaluate all alternatives

They have the knowledge or skill needed to understand the options

Assumptions of Rationality

People have self-discipline enough to follow the system of evaluation

They won’t stop until every option is analyzed

Behavioral Decision Making Approach

Does not assume people are efficient machines

Bounded Rationality

Assumes people have limits to their perceptual and calculative abilities

Satisficing

Selecting the alternative that may not be optimal, but is good enough

(Satisfy + Suffice = Satisfice)

Bad Decisions

“The horse is here to stay, but the automobile is only a novelty—a fad”

Bank president advising Henry Ford’s lawyer not to invest in Ford Motor Co. (1903)

Some Bank President

The attorney ignored the advice, bought $5,000 worth of stock, and sold it several years later for $12.5 million

Bad Decisions

“There is no reason for any individual to have a computer in their home”

Kenneth Olsen, founder of Digital Equipment Corporation (DEC)

(1977)

Bad Decisions

“Who the hell wants to hear actors talk?”

Harry M. Warner, Warner Bros.

(1927)

Bad Decisions

“We don’t like their sound. Groups of guitars are on the way out”

Decca Records, rejecting the Beatles

(1962)

Stooges

Stooges

True love has stricken the boys!

Crossbows at 50 feet.

One (poisoned) arrow per Stooge

Stooges

Curly

Shoots First

20% accuracy

Stooges

Larry

Shoots Second

80% accuracy

Stooges

Moe

Shoots Third

100% accuracy

Stooges

Curly wants to know:

“Where do I shoot to maximize my chances of staying alive?”

Let’s Make a Deal!

1 2 3

Available Prizes

$100

$100,000

8 x 10 autographed photo of Milli Vanilli

(actually a photocopy of the picture)

Let’s Make a Deal!

1 2 3

Let’s Make a Deal

What is the probability that the $100k is behind the selected door?

1/3

What is the probability that the $100k is not behind the selected door?

2/3

Why is it 2/3?

Let’s Make a Deal

Because probabilities always have to add up to 1

1/3 + 2/3 = 3/3 = 1

Let’s Make a Deal

1 2 3

Let’s Make a Deal

Do you want to switch doors?

Let’s Make a Deal

What is the probability that the $100k is behind the selected door?

Let’s Make a Deal

Marilyn vos Savant’s column in Parade

Economic Perspectives journal

Monty Hall article -- New York Times

Counter-Intuitive Problems

Our intuition can be wrong

Common sense can be wrong

Common knowledge can be wrong