MGT 3200 Lecture : Lecture Notes- Test 2
Lecture Notes
• Heuristics- a labor saving device, a short cut, a rule of thumb.
• Reduces the costs of thinking
• Advantages of heuristics:
• Time saving/increases efficiency
• May produce more good decisions than bad decisions.
• Simplifies things.
Had a "which of the following" question on this
• Disadvantages of heuristics :
• They implicitly guide our judgement. We often don’t realize we're using them.
• If we over reply on them, the can lead to errors (that can sometimes be severe)
• Causes us to stop using our brain
• Can lead us to faulty conclusions.
• When heuristics lead to errors in judgement, they are called biases.
• Two types of heuristics:
• Availability heuristic- used when managers assess the frequency of an event by the
extent to which instances of that event are easily recalled in memory.
• Something memorable has to be frequent.
• Not memorable, it's infrequent.
• Problems:
• Can be fallible because recall of an event by more than just the frequency
of the event.
• Events that are vivid, emotional, specific, recent, or easily imagined are
more easily recalled and as such, are seen as more frequent than what
they actually are.
• Underestimate frequency= unemotional, bland, in the distant past,
difficult to imagine, vague
• Representativeness heuristic: reflects the tendency of managers to assess the likelihood
of an occurrence by matching it with a preexisting category (stereotype)
• Involves the use of stereotypes in making judgements.
• When you miss an opportunity to know who they really are, the
representativeness heuristic becomes a representativeness bias.
• Problems:
• The use of stereotypes causes us to miss opportunities to actually know
people.
• Prospect theory- the pain associated with losing x is far greater than the pleasure associated with
gaining x.
• Which of the following are true about heuristics?
• All of the above
• They make us more efficient. They simplify complex environments. They produce
more good than bad decisions. When they lead to errors, they are called biases.
• When a decision is framed negatively, the decision maker....?
• Is likely to take more risks
• Negatively framed= see as a loss
• All of the following could cause one to overestimate the frequency of an event except
• An event that is hard to imagine
• In the gambler's fallacy, the person believes after a number of unfortunate events that the
likelihood of good fortunate is
• Nearly a sure thing
• Five steps of the creative process:
• Preparation
• Concentration (kills your creativity)
• Incubation (subconscious)
• Illumination (Eureka!/the "I found it" moment)
• Evaluation
• Managers make decisions to accomplish organizational goals more efficiently.
• Decision making is NOT a function of management, but decision-making techniques are applicable
and valuable to all functions of management.
• Decision making is most closely associated in the planning function of management.
• Two major categories of decisions:
• Programmed- specific procedures that have been developed for routine, repetitive
problems.
• Rule or standard operating procedure used in making the decision
• Ex. Don’t look at effort put into classes, just the grades.
• Don’t have to think about it
• First line managers make a lot of these
• Most decisions made in an organizations are programmed decisions.
• Non-programmed= specific solutions that to problems that are novel(new), unique,
complex, and unstructured
• Have to think about it.
• Ex. Merging with a company when you've never done that
• As you move up the management period, non programmed decisions increase in
prevalence.
• The more freedom you have in making the decision, the more non-programmed
decisions you're making
• Has to do with forecasting
• Law of planning- the tendency for the day-today stuff to overshadow the complex stuff
• Programmed decisions overshadowing non-programmed decisions.
• On test, will give a scenario of a decision and ask what type of decision it is.
• Every program decision was once a non-programmed decision!
• Three conditions under which managers will make decisions: (Can tell based on probabilities)
• Certainty (probabilities 100%)
• Nothing is left to chance. Ambiguity is zero for all alternatives. 100% probability
• Manager knows all the available alternatives and the outcomes associated with them.
• No element of chance that intervenes between an alternative and its outcome.
• Easiest and least frequent condition.
• Program
• Risk (probabilities 0-100%)
• Like rolling a dice.
• Key to making good decisions under risk?
• Accurately determining the probabilities associated with each alternative
• Doing this right does not necessarily mean you'll have a positive outcome
• Doing this wrong could negatively affect your profitability.
• Odds are between 0 and 100 percent. Ambiguity is some.
• Lack of certainty regarding outcomes of various alternatives, but awareness of
probabilities associated with their occurrence
• Alternatives are known, but probabilities are not.
• No sure thing. Know something, but not everything.
• Ex. Accepting a student into your college because they mean the requirements, but
not being certain that they will graduate from your college.
• Could be both programmed and non-programmed decision.
• Most common
• Uncertainty (no probabilities)
• Two types of uncertainty: worst case uncertainty and best case/typical case
• Worst-case uncertainty:
• Know NOTHING (alternatives, probabilities, etc.)
• Best case uncertainty:
• Know alternatives but do not know probabilities
• Because no one has ever faced it.
• Non-programmed decisions
• Most difficult decision-making condition.
• Application examples:
• You area construction company. The union gives you an offer that you have to accept
or deny. If you accept, you have a 100% percent chance of facing higher labor costs
and a 100% percent chance of avoiding a riot(certainty)
• Admission procedures state that if a student has at least a 30 ACT, you should accept
them. You have no idea whether not they'll actually graduate.
• On baseball team. Bases are loaded. Upcoming batter has batter average of 0.225(not
great odds). Four players on bench, batting 0.310,0.400, 0.295, and 0.300. call up the
batter with the average of 0.400. Decision was made under risk bc there's still a
chance of missing.
• Models of decision making:
• Traditional/economic model
• Conditions are certain.
• Manager has perfect knowledge of all alternatives and outcomes.
• Manager has well order and stable set of preferences and the ability to evaluate
all the consequences of all the alternatives.
• Two major assumptions:
• Decision maker is completely rational.
• Decision maker maximizes benefits (minimizes costs) ("economic man")
• You go through all alternatives and pick the best one.
• Time consuming process.
• A prescriptive model bc this is how we should make decisions
• Behavioral/bounded rationality model
• Aka a descriptive model (how we actually make decisions)
• Try to be rational, but there are limits to our rationality (called bounded rationality)
(not irrational, just less rational)
• Three things that limit our rationality:
• Limited mental capacity (cant know everything)
• Emotional state (make quality of decision go down)
• Unforsee-ability of future events
• Keep probability below one or one hundred percent
Document Summary
Lecture notes: heuristics- a labor saving device, a short cut, a rule of thumb, reduces the costs of thinking, advantages of heuristics, time saving/increases efficiency, may produce more good decisions than bad decisions. Had a "which of the following" question on this: disadvantages of heuristics , they implicitly guide our judgement. Is likely to take more risks: negatively framed= see as a loss, all of the following could cause one to overestimate the frequency of an event except, an event that is hard to imagine. In the gambler"s fallacy, the person believes after a number of unfortunate events that the likelihood of good fortunate is: nearly a sure thing. Five steps of the creative process: preparation, concentration (kills your creativity, evaluation. Don"t look at effort put into classes, just the grades: don"t have to think about it, most decisions made in an organizations are programmed decisions.
