Day 5: Models of Judgment and Decision

Making I

Sam Yam, Ph.D.

Assistant Professor of Management
National University of Singapore
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Last Class
1. Moral disengagement
2. Six rules of persuasion
3. Kidney case winning teams
A4: Teams 3, 1, 9, 6, 7

A5: Teams 6, 7, 3, 4, 8
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Today
1. System 1 vs. System 2
2. Discussion of various biases
3. Judgment in a Crisis simulation
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Auction
• No collusion and communication.
• The highest bidder pays what they bid and receives $20.
• Bidding starts at $1, proceeds in $1 increments.
• The second highest bidder pays what they bid.
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 NUS Presentation Title 2006

Rational Decision Normative

Bounded Intuition &
Making Model
Rationality Heuristics
(Optimizing) (Satisficing)

Step 1. Completely define the problem

Step 2. Identify complete set of decision criteria
Step 3. Allocate objective weights to criteria
Step 4. Develop complete set of alternatives
Step 5. Evaluate alternatives simultaneously
Step 6. Select best alternative
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Rational Decision: Example

Criteria, Weights, & Ratings (scores out of 5)
Salary + Interesting Coworkers/ Develop New Weighted
Options
Benefits Work Boss Skills total
Weights 20% 30% 30% 20% 100%

Current Job 3 3 4 3 3.3

Job A 2 3 5 4 3.6

Job B 4 5 3 5 4.2

Job C 3 4 2 5 3.4
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Identify the Problem: Example

How do we respond to the filmmaker?

Do we sever ties with suppliers?
Do we pull out of the carpet business?
Do we do anything else to address the
issue of child labor?
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Rational Decision Normative

Bounded Intuition &
Making Model
Rationality Heuristics
(Optimizing) (Satisficing)
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Bounded Rationality
• Respond to a complex problem by reducing the problem to
a level at which it can be readily understood

Satisficing
Focus on a narrower set of criteria
Evaluate smaller set of options
Inexact estimation in evaluation
Select first acceptable solution, even if it is not optimal
Maybe use previous solution
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A Model of Bounded Rationality

Ascertain Select a Limited Identify a

the Need Set of Limited Set
for a Decision Criteria of Alternatives

Compare Select the

Alternatives First “Good
Sequentially Enough” Choice

Expand No A “Satisficing” Yes

Simplify
Search for Alternative
the Problem
Alternatives Exists

Herbert Simon, Nobel Prize-winning scholar (1957)

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System 1 and System 2

• •
System 1

System 2
Automatic Attentional
• Fast • Slow
• Little or no effort • Effortful
• No sense of • Subjective
voluntary control experience of
choice
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Intuition (System 1)
• Outside of conscious thought
• Often laden with affect (mood/emotion)
• Holistic
• Very fast
• Often based on experience
• Effective when experience is high and situation matches
experience; much less effective otherwise
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Cognitive Reflection Test

1. A bat and a ball cost $1.10 in total. The bat costs $1.00 more than the ball.
How much does the ball cost?

2. If it takes 5 machines 5 minutes to make 5 widgets, how long would it

take 100 machines to make 100 widgets?

3. 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?
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Cognitive Reflection Test

1. A bat and a ball cost $1.10 in total. The bat costs $1.00 more than the ball.
How much does the ball cost? 5 cents (System 2) vs. 10 cents (System 1)

2. If it takes 5 machines 5 minutes to make 5 widgets, how long would it

take 100 machines to make 100 widgets? 5 minutes (System 2) vs. 100 mins
(System 1)

3. 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? 47 days (System 2) vs. 24 days
(System 1)
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Common biases
Escalation of commitment
Availability bias
Randomness error
Loss aversion (prospect theory)
Anchoring bias
Fundamental attribution error
Sunk cost
Decoy bias
Endowment effect
Status quo
And many more….
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Common biases
Escalation of commitment:
Availability bias
Randomness error
Loss aversion (prospect theory)
Anchoring bias
Status quo bias
Fundamental attribution error
Sunk cost
Decoy bias
Endowment effect
And many more….
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Escalation of Commitment
• Initial budget in 1986: $2.5 billion
• Budget increase in 1988: $30 billion
• Budget increase in 2008: $24 billion

V22 Osprey
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Letter K task
• K_ _ _ _ _ _
• __K____
• ~1:3

• Availability/Confirmation biases
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Availability/Confirmation Biases &

Polarization of Views
Famous study about people’s attitudes toward the death penalty
(Lord, Ross, and Lepper, 1980)

People were shown two studies: One study showed that the death
penalty had a deterrent effect, while the other study provided data
contradicting that finding.

Examining both studies did not lead to a moderation of views;

instead, it led to polarization of people’s views.

In other words, they favored the study that confirmed what they
already believed. They assimilated data in a biased way.
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Fake news?
• 2016 presidential election (N = 3,500)
• Facebook data: Links shared
• 26% shared 10-100 links; 61% shared more than 100 links
• 8.5% shared 1 one or more fake news to their friends

Guess et al.,
2019 Science
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Randomness error: Gambler's fallacy

• If something happens more frequently than normal during a given
period, it will happen less frequently in the future
• Fell on black for 26 spins in the Monte Carlo Casino on August 18th,
1913
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Randomness error: Law of small numbers

British explorers, South Pole, 1912

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Randomness error: Law of small numbers

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Randomness error: Hot hand fallacy

• Klay Thompson (hit 10 3-pointers in a row on Jan 21st, 2019)
• Klay Thompson 3-point field goal % in this season = 38.2%
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Randomness error
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Anchoring bias

Being influenced by the first information received about a

decision, even if it is irrelevant
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Anchoring bias
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Anchoring bias: Irrelevant Anchors Still

Matter
Last two digits of Social Security Number
00 -19 20 -39 40 -59 60 -79 80 -99 Correlation

Cordless
$8.64 $11.82 $13.45 $21.18 $26.18 0.42
trackball
Cordless
$16.09 $26.82 $29.27 $34.55 $55.64 0.52
keyboard
Design
$12.82 $16.18 $15.82 $19.27 $30.00 0.32
book
Neuhaus
$9.55 $10.64 $12.45 $13.27 $20.64 0.42
chocolates
1998 Côtes
$8.64 $14.45 $12.55 $15.45 $27.91 0.33
du Rhône
1996
$11.73 $22.45 $18.09 $24.55 $37.55 0.33
Hermitage
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Status quo
a) Too lazy to make decisions, so accept the default
b) Too difficult to make decisions: The more choices you are given, the
more pull the status quo has
c) Rule of satisficing (“Good enough”), not optimizing

**Not making a decision is a decision**

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Status quo: Sam’s career

2006-2009: Graduated with a BS in child psychology

2009: Entered a child psychology PhD program
2011: Received my MA in child psychology; two additional years till my
PhD (i.e., 2013)
2011: Dropped out and moved to the business school
2015: Spent 2 more years to receive my PhD
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Loss aversion (Prospect theory)

It is better to not lose $100 than

to gain $100
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Framing (layoff)
Safe option: 200 of the planned 600 people will be retained
Risky option: 1/3 probability that all 600 people will be retained; 2/3
probability that no one will be retained

Safe option: 400 of the planned 600 people will be fired

Risky option: 1/3 probability that no one will be fired,;
2/3 probability that all 600 people will be fired

**People prefer sure gain over probabilistic gain**

**People prefer probabilistic loss over sure loss**
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Certainty as a moderator (money)

Low certainty condition:
Receiving $4,000 with 0.2% probability
Expected value = 4000 X .002 = $8
Receiving $8,000 with 0.1% probability
Expected value = 8000 X .001 = $8
High certainty condition:
Receiving $4,000 with 90% probability
Expected value = 4000 X .9 = $3600
Receiving $8,000 with 45% probability
Expected value = 8000 X .45 = $3600
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Results: Certainty (money)

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Simulation: Judgment in a Crisis

• Go to the simulation via IVLE
• Whenever you are done with the simulation, you can
leave the room (takes 45-60mins)
• Next week, we will discuss the findings in class, some
remaining biases, and strategies to avoid decision biases