The document outlines several models of decision making: - The rational-economic model assumes people are entirely rational and have perfect information to make optimal decisions. - The bounded rationality model recognizes people have limited information and consider solutions that are "good enough" rather than optimal. - Image theory proposes decisions are made intuitively through compatibility and profitability tests rather than rational analysis. - Framing effects demonstrate how the presentation of options, whether framed in terms of gains or losses, influences decision making. Cognitive biases like availability heuristic and representativeness heuristic also impact decisions.

1. • Conception of decision making as a series
of analytical steps
• The model focuses on two aspects:
– identifying the problem
– implementing the solution

2. Define
Objectives
Predecision
Generate
Alternatives
Evaluate
Alternatives
Make a
choice
Implement
choice
Evaluate
choice

3. Programmed vs Non-
Programmed Decisions
• Programmed decisions are highly routine
decisions usually made by lower level
workers alone. (Time to re-order toner
for the copy machine)
• Non-programmed decisions -- Decisions
about a novel problem. There is no set
course of action. (Identifying the cause of
some rare disease)

4. Certain vs Uncertain Decisions
• The degree of risk involved in making the
decision. The means the continuum
ranges from
– complete uncertainty (no risk) to
– complete uncertainty (high risk)
• The point is to minimize risk by
obtaining information

5. Rational-Economic Model
• A model in which decision makers
consider all possible solutions before
selecting the optimal one. Presumes
• We are entirely rational and logical
• We have complete and perfect
information
• We can process all this information

6. Bounded Rationality Model
• A model that realizes that humans have a
limited view of the problem, do not have
perfect information or all the alternatives
• We accept a solution that is good enough
• This is called satisficing or settling for the
decision that meets the criteria but may
not meet them optimally

7. Image Theory
• Following your gut instinct. This model
says we make decisions intuitively, by
going through a two-step process. Step
one is the compatibility test. Does the
alternative feel right?
• Step 2: Profitability test - Which of the
alternatives that feel right is best?

8. Framing Effects
• (from Bazerman, 1983): A large car manufacturer has
recently bee hit with a number of economic difficulties
and it appears as if three plants need to be closed and
6,000 employees laid off. The vice-president of
production has been exploring alternative plans to
avoid this crisis. She has developed two plan
• Plan A: This plan saves one of the three plants and
2,000 jobs
• Plan B: This plan has a 1/3 probability of saving al l
three plants and all 6,000 jobs but a 2/3 probability of
saving no plants and no jobs.

9. Framing Effects
• A large car manufacturer has recently bee hit with a
number of economic difficulties and it appears as if
three plants need to be closed and 6,000 employees laid
off. The vice-president of production has been
exploring alternative plans to avoid this crisis. She has
developed two plan
• Plan C: This plan will result in the loss of two of the
three plants and 4,000 jobs.
• Plan B: This plan has a 2/3 probability of resulting in
the loss of all three plants and all 6,000 jobs but a 1/3
probability of losing no plants and no jobs

10. More Framing
• A. A sure gain of $240.
• B. A 25% chance to gain $1,000 and a
75% chance to gain nothing
• C. A sure loss of $750
• D. A 75% chance to lose $1,000 and a
25% chance to lose nothing

11. Availability Heuristic
• The tendency for people to base decisions
on information that is easily accessed
• Which is riskier?
• A. Driving a car on a 400 mile trip
• B. Flying on a 400 mile trip on a
commercial flight

12. Availability Heuristic
• You are traveling in the Middle East.
Which is the greater worry?
• A. Being hurt in an auto accident
• B. Being hurt in a terrorist attack

13. Representativeness Heuristic
• The tendency to perceive other in stereotypical
ways if they appear to be typical of the category
to which they belong
• Mark is finishing his MBS at a prestigious
university. He is very interested in the arts and
at one time considered a career as a musician.
Mark is most likely to take a job
• A. In the management of the arts
• B. With a management consulting firm

14. Other Cognitive Biases
• Anchoring -- People develop estimates based on
initial information. When that information
turns out to be wrong, people make
adjustments to their decisions but not enough
to overcome the impact of the initial piece of
information.
• Confirmation bias -- We tend to focus only on
evidence that supports our decisions.
• Overconfidence -- Because of confirmation
bias, we are more confident than we are
correct.

15. Backwards and Forwards