26 OKTOBER 2022
JUDGMENT & DECISION MAKING
SUMMARY OF THE LECTURES
DECISION MAKING IN BUSINESS AND SOCIETY
Vrije Universiteit van Amsterdam
,Judgment & Decision Making
Lecture 1 05-09-2022
Bad decisions
Errors in strategic decision making are not exceptional. The majority said bad decisions are
just as frequent as good ones.
When it comes to certain types of decisions, failures are much more frequent than
successes. It is possible to predict where leaders are going to make mistakes. Every
successful strategy is successful in its own way. But alle strategic failures are alike.
Not about bad man theory of failure. Bad decisions are not made by bad leaders. Good
leaders make predictable bad decisions. Human beings make mistakes.
Behavior science
Humans are not perfect decision makers. Not only are we not perfect, but we depart from
perfection or rationality in systematic and predictable ways. The understanding of these
systematic and predictable departures is core to the field of judgment and decision making.
By understanding these limitations, we can also identify strategies for making better and
more effective decisions.
How can we use insights to improve decision making?
1
,Judgment & Decision Making
Lecture 2 07-09-2022
Types of decisions
Major reflective decisions, important decisions
- Example: Whether or not to invest in a stock or business?
Low level decisions, less important decisions
What should you take into account by making a decisions?
- Outcomes, consequences
- Possible risks
- Probability that something happens
What you want. Also, what you want to avoid. How you feel about different wasy the decision
could turn out.
Strength of preferences (and dislikes) for particular outcomes?
What factors or events will affect whether the outcome will be good, mediocre or bad, and to
what degree?
What factors should affect a decision?
What you want. Also, what you want to avoid. How you feel about different ways the decision
could turn out. Strength of preferences (and dislikes) for particular outcomes? What factors
or events will affect whether the outcome will be good, mediocre or bad, and to what degree?
How likely are the different possibilities?
How should decisions be made?
Rational decision making process:
- Define the problem
- Identify the decision criteria
- Weight the identified decision making criteria
- Generate possible alternatives
- Rate each alternative against the decision maker’s criteria
- Compute the optimal decision
How you should make the ideal decision.
Assumptions:
- The decisionmaker is rational
- The problem is clear and unambiguous
- The decisionmaker has complete information
- Not time or cost constraints
- Choice will be one with the maximum pay-off
2
, Normative decision analysis:
Enumerate options and outcomes. Construct a decision analysis for the decision. Evaluate
the probabilities of different possible outcomes. Determine which option has the greatest
“expected utility.” “people should behave in this way to maximize their utilities.
The description of a question should not matter for the decision.
Reference point:
The reference point is important from which the options are evaluated.
Reference dependence:
“When we respond to attributes such as brightness, loudness, or temperature, the past and
present context of experience defines an adaptation level, or reference point, and stimuli are
perceived in relation to this reference point. Thus, an object at a given temperature may be
experienced as hot or cold to the touch depending on the temperature to which one has
adapted.”
People think about uncertain events in terms of gambles. Gambles have two components:
- Probability, p
- Value, v
The expected value of a gamble (EV) = p x v
Expected utility theory
Dominance principle
Alternative gambles can be ranked from best to worst in terms of expected value
Cancellation
A choice between gambles should depend only on those outcomes that differ.
Transitivity
If you prefer A to B and B to C, then you must prefer A to C.
Invariance
Preference should remain invariant or stable, no matter how choices are described.
Framing effect
Expected utility theory assumes description invariance: different formulations of the same
choice problem should give rise to the same preference order. Evidence that variations in the
framing of options (in the description) yield systematically different preferences. Framing
effects lead to violation of the invariance and the dominance axioms of expected utility theory
3
JUDGMENT & DECISION MAKING
SUMMARY OF THE LECTURES
DECISION MAKING IN BUSINESS AND SOCIETY
Vrije Universiteit van Amsterdam
,Judgment & Decision Making
Lecture 1 05-09-2022
Bad decisions
Errors in strategic decision making are not exceptional. The majority said bad decisions are
just as frequent as good ones.
When it comes to certain types of decisions, failures are much more frequent than
successes. It is possible to predict where leaders are going to make mistakes. Every
successful strategy is successful in its own way. But alle strategic failures are alike.
Not about bad man theory of failure. Bad decisions are not made by bad leaders. Good
leaders make predictable bad decisions. Human beings make mistakes.
Behavior science
Humans are not perfect decision makers. Not only are we not perfect, but we depart from
perfection or rationality in systematic and predictable ways. The understanding of these
systematic and predictable departures is core to the field of judgment and decision making.
By understanding these limitations, we can also identify strategies for making better and
more effective decisions.
How can we use insights to improve decision making?
1
,Judgment & Decision Making
Lecture 2 07-09-2022
Types of decisions
Major reflective decisions, important decisions
- Example: Whether or not to invest in a stock or business?
Low level decisions, less important decisions
What should you take into account by making a decisions?
- Outcomes, consequences
- Possible risks
- Probability that something happens
What you want. Also, what you want to avoid. How you feel about different wasy the decision
could turn out.
Strength of preferences (and dislikes) for particular outcomes?
What factors or events will affect whether the outcome will be good, mediocre or bad, and to
what degree?
What factors should affect a decision?
What you want. Also, what you want to avoid. How you feel about different ways the decision
could turn out. Strength of preferences (and dislikes) for particular outcomes? What factors
or events will affect whether the outcome will be good, mediocre or bad, and to what degree?
How likely are the different possibilities?
How should decisions be made?
Rational decision making process:
- Define the problem
- Identify the decision criteria
- Weight the identified decision making criteria
- Generate possible alternatives
- Rate each alternative against the decision maker’s criteria
- Compute the optimal decision
How you should make the ideal decision.
Assumptions:
- The decisionmaker is rational
- The problem is clear and unambiguous
- The decisionmaker has complete information
- Not time or cost constraints
- Choice will be one with the maximum pay-off
2
, Normative decision analysis:
Enumerate options and outcomes. Construct a decision analysis for the decision. Evaluate
the probabilities of different possible outcomes. Determine which option has the greatest
“expected utility.” “people should behave in this way to maximize their utilities.
The description of a question should not matter for the decision.
Reference point:
The reference point is important from which the options are evaluated.
Reference dependence:
“When we respond to attributes such as brightness, loudness, or temperature, the past and
present context of experience defines an adaptation level, or reference point, and stimuli are
perceived in relation to this reference point. Thus, an object at a given temperature may be
experienced as hot or cold to the touch depending on the temperature to which one has
adapted.”
People think about uncertain events in terms of gambles. Gambles have two components:
- Probability, p
- Value, v
The expected value of a gamble (EV) = p x v
Expected utility theory
Dominance principle
Alternative gambles can be ranked from best to worst in terms of expected value
Cancellation
A choice between gambles should depend only on those outcomes that differ.
Transitivity
If you prefer A to B and B to C, then you must prefer A to C.
Invariance
Preference should remain invariant or stable, no matter how choices are described.
Framing effect
Expected utility theory assumes description invariance: different formulations of the same
choice problem should give rise to the same preference order. Evidence that variations in the
framing of options (in the description) yield systematically different preferences. Framing
effects lead to violation of the invariance and the dominance axioms of expected utility theory
3
