Course support for the DIA module at the ESC Pau

1. Managerial Decision Making
http://DSign4Analytics.com
Cognitive Biases
January 24 2017
Prof. M. MINHAJ

2. Cognitive
Biases
Working
with
Data
Decisions
under
Risk

3. Kindly Note
• Interaction in the class is important (your
English is not being assessed !)
• Reading assignments and the recommended
use of web resources / tools is an absolute
prerequisite for meaningful class participation.

4. What are your expectations
from the course ?

5. The context of the course….

6. Border less economy
Business
Agility
Unceasing technological
innovations
Social Issues
Survival of the fittest

7. Managerial Decision Making
• Management is a process by which
organizational goals are achieved by using
resources
– Inputs: resources
– Output: attainment of goals
– Measure of success: outputs / inputs
• Management  Decision Making
• Decision making: selecting the best solution
from two or more alternatives

8. Why Decision Making is difficult ?
• Information systems, advanced search engines, and
globalization result in more and more alternatives to choose
• Government regulations and the need for compliance,
political instability and terrorism, competition, and
changing consumer demands produce more uncertainty,
making it more difficult to predict consequences and the
future
• Other factors are the need to make rapid decisions, the
frequent and unpredictable changes that make trial-and-
error learning difficult, and the potential costs of making
mistakes

9. Types of decisions

10. Gory and Scott-Morten Framework

11. Simon’s Decision Making Model
Three Steps : Intelligence, Design and Choice.
Intelligence Phase : The problem is identified, and
information is collected concerning the problem.
Design phase : Alternatives are developed. This phase may
involve a great deal of research into the available options.
Choice Phase : Alternatives that are developed in the
design phase are evaluated and one of them is chosen.

12. Bounded rationality
• It is the idea that when individuals make decisions, their rationality is
limited by the tractability of the decision problem, the cognitive
limitations of their minds, and the time available to make the decision.
• Decision-makers in this view act as satisficers, seeking a satisfactory
solution rather than an optimal one.
• Herbert A. Simon proposed bounded rationality as an alternative basis for
the mathematical modeling of decision-making, as used
in economics, political science and related disciplines.
• It complements "rationality as optimization", which views decision-making
as a fully rational process of finding an optimal choice given the
information available.

13. Reading Assignment
• Bounded rationality - Use Google Scholar
• The Hidden Traps in Decision Making (HBR
article) – Use the course portal
(http://DSign4.biz)

14. Cognitive Biases

15. Class Activity

16. Anchoring Trap
Ex. Population of a Country

17. The Framing Effect
Ex. Decision to perform a operation

18. Endowment Effect
Status quo bias

19. The Sunk Costs Trap
Ex. Movie Ticket

20. Avoiding Traps
• Brainstorming and Formal Models
• Decision Trees

21. Decision Trees
• Symbols used :
• The numbers on the edges coming out of circle
(chance node) denote the probabilities.
Choice Node
Chance Node (Nature)
Edges connecting the nodes