Week 3-1 Individual Decision Making I - Fall 2024 PDF

MGT 3030-301: Human Behavior in Organizations Hak-Yoon Kim Individual Decision Making I Sep 10, 2024  Perception The process by which individuals select, organize, and interpret the input from their sens...

MGT 3030-301: Human Behavior in Organizations Hak-Yoon Kim Individual Decision Making I Sep 10, 2024  Perception The process by which individuals select, organize, and interpret the input from their senses to give meaning and order to the world around them People try to make sense of their environment and the objects, events, and other people in it Ex: Your mind can't help but create a triangle. 2  Components of Perception Perceiver Target Situation 3  Components of Perception Perceiver Target Situation Personality traits, beliefs, goals, culture, age, gender, etc. Perceiver: The person trying to interpret some observation that he or she has just made or the input from his or her senses. 4  Components of Perception Perceiver Target Situation Status, age, gender, attractiveness, behavior (i.e., apologizing, offering help, etc.) Target: Whatever the perceiver is trying to make sense of. Another person, a group of people, an event, a situation, an idea, a noise, or anything else the perceiver focuses on. 5  Components of Perception Perceiver Target Situation Cultural norms, other people’s behavior, scarcity of resources, time pressure, etc. Situation: The situation is the context in which perception takes place – a committee meeting, the hallway, the office coffee maker, and so on. 6 7  Perception Is Not Always Reality There are things we perceive, even though they are not “real” 8 Humans are Cognitive Misers Given limited cognitive capacity, cognitive shortcuts (aka heuristics) are adaptive Heuristic: a cognitive rule of thumb Simple, efficient rules that help people simplify complex judgments & decisions Learned or hard-coded by evolutionary processes BUT, even good “rules” have their exceptions 9  System 1 and System 2 Processing Our brain processes information in 2 ways: System 1 and System 2 10  System 1 and System 2 System 1: Automatic, fast and often unconscious. It is autonomous and efficient, requiring little energy or attention.  The majority of our daily decisions are made in this mode.  Good for quick decisions with little information.  Can do multiple things at the same time.  Highly sensitive to context.  Suppresses alternative stories not consistent with dominant narrative.  Fast, but prone to biases and errors. 11  System 1 and System 2 System 2: Effortful, slow and controlled way of thinking. It requires energy and can’t work without attention.  Deliberate way of thinking.  Much slower than System 1 but more reliable.  More resilient to context, mood, situational factors.  Activated when stakes are high, when obvious errors are detected, or when rule-based reasoning is required. 12 System 1 Error Example 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? The ball does not cost 10 cents…that’s the System 1 response. System 2 would have taken the time to do some basic math: 10 cents for the ball plus $1.10 for the bat ($1 more than the ball) = $1.20, not $1.10 THE BALL COSTS 5 cents (5 cents for ball plus $1.05 for bat = $1.10) 13  Inside Your Name Tent: System 1 Examples System 2 Examples Deciding where to sit in class Deciding which college to attend Driving to school/work Deciding who to fire (hopefully) Grocery shopping Buying a house Going out with people you Driving a new route know well Going out with a new group of friends Day-to-day operations High stake investment decisions 14 Overcoming Bias by Slowing Down “Satisficing” through System 1 is not always bad – sometimes the cost of reaching an optimal decision outweighs the cost of satisficing In complex or high-stakes decisions, slowing down your thinking leads to better decision-making 15 Availability Bias Using the examples that first come to mind making a judgment or decision, instead of harder to find or access information What kills more people per year, sharks or bees? The problem: Readily available information isn’t always correct or representative of the full situation 16  Cognitive Bias Availability Bias Confirmation Bias Representative Bias Over-confidence Bias Anchoring Bias Framing Bias 17  Confirmation Bias We seek and pay attention to information that supports our point of view and discount data that do not, leading to overconfidence in conclusions based on incomplete data. The problem: Our point of view is not always correct. We fail to see the problems or likely resistance to our point of view. 18  Confirmation Bias & Motivated Reasoning Preference: when you would be happier if a particular conclusion were true than if it were false. Preferences are problematic (yet unavoidable because): When information is ambiguous, we interpret it in preference-consistent ways. We weight preference-consistent decision criteria more heavily. We are less critical of preference-consistent information. When we make decisions about things we care about (especially moral/ethical decisions), our process is closer to that of an attorney, than a so-called objective judge. For more information see Ditto, Pizarro, & Tannenbaum, 2009. 19  Representativeness The tendency to generalize from a small sample or a single event The problem: Just because it happened one time or to one person does not mean it will happen to you Example: Customer reviews 20  Over-Confidence Bias When your subjective confidence in your decision is greater than its objective accuracy The problem: Leads to inaccurate decisions and exacerbates other biases 21  Over-Confidence Bias Driving ability 93% of American drivers rate themselves above the median (Svenson, 1980). Entrepreneurial entry An overwhelming majority of entrepreneurs perceive their chances of surviving over 5 years as greater than 70%. In reality, about 33% survive 5 years. Work performance 37% of professional engineers believe themselves to be among the top 5% of performers (Zenger, 1992). 68% of college professors believe their teaching abilities to put them in the top 25% (Cross, 1977). 22  Anchoring Bias The tendency to make decisions based on an initial figure or piece of information The problem: The initial figure or information given may not be accurate or relevant to the decision being made Do you believe that two years from now the US dollar to. Average guess all sections:.75 Euro exchange rate (US$/€) will be above or below $0.40? OR Do you believe that two years from now the US dollar to Average guess all sections: 1.64 Euro exchange rate (US$/€) will be above or below $2.00? What is your best estimate (in US dollars) of what the exchange rate will be two years from now? 23  Framing Bias The tendency for decision makers to be influenced by the way a decision is presented to them. The problem: Question framing rather than evidence drives the response. 24  Framing Bias Example Imagine you are the CEO of a company faced with a difficult choice. Because of worsening economic conditions, 6000 people will need to be fired to reduce the payroll costs and avoid serious financial problems. Two alternative programs to combat the firings have been proposed to you. The estimates of the consequences of the programs are as follows: Which of the two programs would you select? If Program A is adopted, 2000 jobs will be saved. If Program B is adopted, there is a one-third When framed in terms of gains: probability that 6000 jobs will be saved, and a two- 76% chose Program A (all sections) thirds probability that no jobs will be saved. If Program A is adopted, 4000 people will be fired. If Program B is adopted, there is a one-third When framed in terms of losses: probability that nobody will be fired, and a two- 53% chose Program A (all sections) thirds probability that 6000 will be fired. 25