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Managerial Decision Making Session-By-Session Outline

Week 4

Session 4: (January 27/28) The Representativeness and Availability Heuristics

Link to Week 4 Survey (due by start of Super Bowl, Jan 26)

Week 4 Writing Assignment (if chosen, turn in at class). 

Students, I encourage you to come up with your own original ideas rather than simply regurgitate ideas from our discussion. Be creative!

Option 1: Bayes Rule and the more general idea of Bayesian updating are a mathematical formula and big-picture concept for the "correct" use of aggregating new data with old opinions. Explain it thoroughly in qualitative terms, and give an example (numerical or qualitative) that has not been covered in class, where answers using Bayes Rule and human intuition are very different.

You have been chosen the Decision Making czar within your organization. What prescriptive Bayesian measures can you recommend to improve the quality of your firm's decisions? Are there limitations to the Bayesian model?

Option 2:

1) Decision Trees are powerful tools for decision-making, but a "man's gotta know" their limitations. What are they? i.e. strengths and weaknesses. Are there any factors that are not effectively considered when this approach is adopted for decision-making?

You have been chosen the Decision Making czar within your organization. You have decided to insist that all major decision analyses are accompanied by Decision Tree analyses. Is this a good edict? Why or why not? When or when not?

Week 4 PowerPoint slides

Topics: 

  • The conjunction Fallacy
  • Base Rates and Regression to the Mean
  • The Fallacy of Intervention
  • Overuse of Causal Data
  • The Hot Hand
  • Local Representativeness
  • Sample and Storage Biases
  • Vividness
  • Simpson's Paradox

Note for Week 5: You may want to start reading the required textbook Influence (by Cialdini) now.

AFTER-CLASS Readings:   (very important classics but somewhat academic)

**** Kahneman and Tversky, Extentional Versus Intuitive Reasoning: The Conjunction Fallacy In Probability Judgment, CP #8

**** Kahneman and Tversky, Subjective Probability: A Judgment of Representativeness, CP #9

**** Kahneman and Tversky, Availability: A Heuristic for Judging Frequency and Probability, CP #10

AFTER-CLASS Review Questions:

  1. GMAT scores are one key to admittance at the GSB. The average GMAT score would invariably decrease if we had all students here take the test again. Why is this? How does this phenomenon relate to the representativeness heuristic?
  2. Why can the availability heuristic lead to biased decisions?
  3. What steps can we take to prevent availability bias? Make a list of at least 3 managerial situations in your future career in which availability would cause poor decision making? What preventative measures can you think of?
  4. In what circumstances might the availability heuristic be beneficial to your company? How can or should it be used for marketing or advertising? What other corporate uses of availability can you think of?
  5. What are the conditions under which vividness causes biased judgments?

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