Understanding Biases in Decision Making: Assessing Likelihoods and Attractiveness, Essays (university) of Decisione Making for Managers

Download Understanding Biases in Decision Making: Assessing Likelihoods and Attractiveness and more Essays (university) Decisione Making for Managers in PDF only on Docsity! Gathering and Interpreting Information – Essay Plan Intro – when making decisions between alternatives, we gather information, so we can come to some conclusion best course of action. Gather information to determine: • LIKLIHOODS – that a particular action will happen (we have incomplete info about past/ present and of course future) – make a judgement e.g. do we have a current state of the market? Are we competitive? • THE ATTRACTIVENESS of outcomes – subjective value/ utility Either to the manager or to the organisation. This relates to the utility part of decision theory We will argue that people base a lot of their gathering and interpretation of evidence on S1 thinking. This can lead to biased interpretations and conclusions. We can help them improve by highlighting this and then presenting S2 forms of thinking Para 1: Assessing Likelihoods – judgements and probabilities • How good is one at assessing risk and probability and using it to inform decisions • Most errors are made by S1 thinking and biases • People focus on evidence and S1 intuition or just focus on their initial likelihood • Struggle to use S2 thinking as they don’t know how • This is called Bayes Theorem • Evidence that even experts fall foul of this bias • Due to base rate neglect • Do not follow S2, misperceive the risk and end up taking bad decisions from it. Paragraph 2: Bayesian Inference (educated guessing) • This is a way to make guesses about what your data means based on little data. • Capture common sense and knowledge about a situation, thus making better guesses • OJ Simpson – BT used to make an educated assumption that he likely killed his wife • (stats showing previous abuse + partner killed = high) Using BT in management tasks: • Decisions are important. Essential the right one is made • However, we have the ratio bias (jelly bean problem): S1 thinking (Denes-Raj and Epstein, 1994) – automatic and intuitive • The tendency to judge an event as more likely when presented as a large numbered ratio, than a smaller equivalent. • This can lead to suboptimal choices more common amongst people will low numeracy skills (Peters et al, 2006) • Reflects peoples’ tendency to pay too much attention to the numerator rather than the denominator incorrect risk assessments. - Implications: • People are often bad at assessing risk and probability. leads to poor judgements and inappropriate decisions. • People need to be taught how to reason using S2 forms of thinking, but rarely are. • However, there are some numerical and graphical representations that can facilitate assessments of risk and probability. Paragraph 3 – Facilitating assessments of risk and probability Natural frequencies vs. conditional probabilities;