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Decision-Making
Decision-making involves weighing alternatives and choosing
between them.
People don’t always make rational decisions. In the 1950s, economist Herbert
Simon proposed that people’s capacity to process and evaluate multiple alternatives
limits their ability to make rational decisions. Because it is difficult to
simultaneously evaluate all possible options, people tend to focus on only a few
aspects of the available options. This can result in less than optimal decisions.
Two types of decisions are decisions about preferences and risky decisions. People
generally use a variety of different approaches when making these types of
decisions.
Decisions about Preferences
Some decisions require people to make choices about what they would
prefer.
People may use additive or elimination strategies when making decisions
about preferences.
Additive Strategies
When using an additive strategy, a person lists the
attributes of each element of the decision, weights them according to
importance, adds them up, and determines which one is more appealing based
on the result.
Elimination Strategies
Another strategy for making decisions about preferences is called elimination by aspects, which involves eliminating
alternatives based on whether they do or do not possess aspects or
attributes the decision maker has deemed necessary or desirable. People
often use this type of strategy when a large number of options and features
have to be evaluated.
Risky Decisions
When making choices about preferences, people select between known
features of alternatives. In other types of decisions, however, they have to
decide between unknown outcomes. This type of decision-making involves taking
risks.
People make risky decisions by judging the probability of outcomes.
Strategies people use to make risky decisions include calculating expected
value, estimating subjective utility, and using heuristics.
Expected Value
One strategy for making a risky decision is to calculate the expected value of the decision. People calculate the
expected value by adding the value of a win times the probability of a win
to the value of a loss times the probability of a loss.
Subjective Utility
Even when decisions have negative expected values, people still make
such decisions. Some researchers believe that this occurs because people
make some decisions by estimating subjective utility, or the
personal value of a decision’s outcome.
Availability Heuristic
People often use heuristics to estimate probabilities. One heuristic
people frequently use is the availability heuristic. When
people use this rule-of-thumb strategy, they estimate probability based on
how readily they can remember relevant instances of an event. If people can
quickly remember instances of some event, then they will estimate that event
as being quite likely.
Representativeness Heuristic
People also use the representativeness heuristic to
estimate probability. The representativeness heuristic is a rule-of-thumb
strategy that estimates the probability of an event based on how typical
that event is. For example, if Eric the raffle ticket buyer lives in the
United States, has several tattoos, and often wears dark sunglasses and a
leather jacket, is it more likely that he owns a motorcycle or a car? If
people use the representativeness heuristic, they may judge that Eric is
more likely to own a motorcycle. This happens because the description of
Eric is more representative of motorcycle owners.
Bias in Decision-Making
People often make flawed decisions. There are many biases that account for
bad decision-making.
The Tendency to Ignore Base Rates
When using the representativeness heuristic, people frequently ignore
the base rate, or the total number of events.
The Gambler’s Fallacy
The representativeness heuristic can also make people susceptible to
the gambler’s fallacy. The gambler’s fallacy is the false
belief that a chance event is more likely if it hasn’t happened recently.
This belief is false because the laws of probability don’t apply to
individual independent events.
Overestimating the Improbable and Underestimating the Probable
Using the availability heuristic can cause people to overestimate
improbable events. This happens because rare but memorable events come to
mind easily.
Using the availability heuristic can also cause people to
underestimate likely events. This can happen when events are hard to
visualize and don’t easily come to mind.
Minimizing Risk
People sometimes make irrational decisions in an effort to minimize
risk. An event is more likely to be chosen if it’s framed in terms of
winning rather than losing.
Confirmation Bias and Belief Perseverance
Confirmation bias is the tendency for people to look for
and accept evidence that supports what they want to believe and to ignore or
reject evidence that refutes their beliefs. When people reject evidence that
refutes their beliefs, it can also be called belief
perseverance, because rejecting contradicting evidence makes it easy
for people to hold on to their beliefs.
The Overconfidence Effect
The overconfidence effect is the tendency for people to
be too certain that their beliefs, decisions, and estimates are correct.
People can minimize the effects of overconfidence by collecting a lot of
information and evaluating it carefully before making a decision.
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