HULT International Business School
Behavioral Econ. &
Decision Making
Judgment in Managerial Decision Making
Bazerman & Moore:
Chapters 4, 5, 6
Nils Olsen, PhD
17 June 2021
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Chapter 4
Bounded Awareness
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• Bounded Rationality
Nobel Prize Winner, He
ert Simon
(March & Simon, 1958; Simon, 1957) à individual
judgment is bounded in its rationality;
we can better understand decision making
y describing what’s actually occu
ing.
• The Rational Model prescribes how
decisions ought to be made, given full
knowledge of parameters, etc. Behavioral
economics describes how decisions are
made.
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• Bernard Madoff
Stealing from investors: By 2008, confessed to
crime (elaborate Ponzi scheme) = $64.8 billion
$ was sent via ‘feeder funds’ (earned small % of
funds invested + 20% of any returns)
Not noticing the obvious:
• level of returns & stability (which are impossible)
• hints of problems (lacked motivation to investigate)
• Investors, government regulators, investment
ankers – not aware
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Bounded Awareness
• Filtering
To navigate this “one great buzzing, blooming
confusion” (William James, 1890, p. 488), we
constantly filter (cognitively, from birth):
neglecting useful information
paying attention to i
elevant information
(Bazerman & Chugh, 2005)
- unconscious
- automatic
- inefficient
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Bounded Awareness
• Inefficient Filtering
‘Without lifting your pencil, draw (only)
4 lines that connect all nine dots”
(Bazerman & Moore, 2013)
. . .
. . .
. . .
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Bounded Awareness
• Inattentional Blindness
‘Basketball Passes Demo’: Counting # of passes
y one team = co
ectly noticing woman with open
um
ella only 21% of time (Neisser, 1979)
Replications à person in gorilla costume among
asketball players = similar effect
(Simons & Cha
is, 1999; Cha
is & Simons, 2010)
Applications:
- airline pilots
- auto drivers (cell phone) (Levy, Pashler, & Boer, 2006)
- surgeons
- financial management executives
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Bounded Awareness
Bounded Awareness –
Change Blindness
• “Change blindness at the
Harvard University
Institute of Politics”
20 August 2015
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Bounded Awareness –
Change Blindness
• Apollo Ro
ins
NBC TODAY, 6 Fe
uary 2013
“Supernatural pickpocketing skills”
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Change Blindness à Apollo Ro
ins, “The gentleman thief”
• Change Blindness
Failing to notice obvious changes in one’s
physical environment (Simons, 2000)
Applications:
- legal
- medical
- business
In business, and when it comes to unethical
ehavior, many small steps (vs. one large step)
often more easily accepted (a la Gino & Bazerman, 2009)
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Bounded Awareness
• Focalism & Focusing Illusion
(Wilson, Wheatley, Meyers, Gilbert, & Axsom, 2000)
•
Focusing Illusion – tendency to make judgments
ased on only subset of available information
(overweighting the subset of information … and
underweighting the unattended information)
e.g., ‘Medical Prognosis’ (cause of
medical issue): When Medical Doctors
assessing probabilities of 4 mutually exclusive
prognoses for patients …
à total of 4 prognoses > 100% (Tversky & Koehler, 1994)
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Bounded Awareness
• Bounded Awareness in Groups
awareness of groups can be bounded by information
coming from a group discussion
Groups focus more on shared data (that group
already has) versus unique data (unshared, and
known by only one person) (Stasser, 1988; Stasser & Stewart,
1992; Stasser & Titus, 1985; Gruenfeld, Mannix, Williams, & Neale, 1996)
e.g., Selecting one of three candidates:
As individuals, 67% chose candidate A
*** vs *** when individuals combined into
groups, 83% chose candidate A (Stasser & Titus, 1985)
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Bounded Awareness
• Monty Hall Game
Named after Monty Hall, host of “Let’s make a deal”.
Once people select one option … and host reveals
one other option (showing small prize) – then giving
player option to switch choice – many people do not
switch choice (mistakingly think: 50% / 50% chance
of getting large prize); It’s actually 33% / 33% / 33%
Optimal move à ALWAYS switch choices
(doubling probability of getting large prize)
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Bounded Awareness
Mood & Vigilance of Processing
Slightly NEGATIVE mood
= more precise, more vigilant (careful)
processing of cognitive information
There are limits:
Extreme negative mood
= sub-optimal (not ideal) for
information processing
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Chapter 5
Framing &
Preference Reversals
a few key points …
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– cognitive bias
Within preference reversals, a person decides on a
choice either within the context of a bundle of
options, or as distinct (separate, non-bundled)
options where some of the options lean in the
positive direction and others lean in the negative
direction (essentially presented as either a loss or
gain – with respect to money, time, energy
expended, etc). e.g., CHOICE (focus on
probability) … vs. … BIDS (focus on amounts))
Preference Reversal
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Framing Effect – is a type of cognitive bias.
Within framing, a person decides on a choice
within a set of options, where some of the
options lean in the positive direction and others
lean in the negative direction (essentially
presented as either a loss or gain – with respect
to money, time, energy expended, etc).
Framing Effects
Prospect Theory
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Prospect Theory – the idea that “losses loom
larger than gains” (Kahneman & Tversky). A dollar
lost is more debilitating than a dollar gained is
exhilarating.
When options are framed in terms of “gains”
people tend to be risk-averse (e.g., sell to early)
… whereas when options are framed as “losses”,
people tend to be risk-seeking (e.g., hold on to
the option, and “sell” too late)
Framing Effect
Prospect Theory
(Kahneman & Tversky, 1979 & 1992)
* Nobel Prize in Economics (2002)
* Theory Created in 1979, & developed in 1992
* ‘Losses loom larger than gains’
* Risk-averse on gain function (sell to early);
Risk-seeking on loss function (hold too long).
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Chapter 6
Motivational &
Emotional Factors
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• “Foot
idge Dilemma” (Foot, 1978):
utilitarian approach: “doing the greatest good for
the greatest number of people”
• Trolley Problem
• https:
www.youtube.com/watch?v=bOpf6KcWYyw
deontological approach (Kant, 1964): morality of
an action based on the the action’s adherence to
ules and/or duties
• Kant’s Deontological Approach to Ethics
• https:
www.youtube.com/watch?v=x_uUEaeqFog
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Ethical Dilemmas
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https:
www.youtube.com/watch?v=bOpf6KcWYyw
https:
www.youtube.com/watch?v=x_uUEaeqFog
• ‘Want versus Should’
Homer’s The Odyssey: Ulysses – knowing that his
sea faring crew would soon encounter the Sirens
(mythical female enchanters luring sailors to remote
islands). Ulysses instructed crew to block ears to
avoid being lured by the songs – and tie him with
opes to the boat’s mast so that he would not be
tempted by the songs. His plan worked.
• How often are people faced with the battle between
what we want to do and what we should do?
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Emotion & Cognition - Collide
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• ‘Want vs. Should’
Managing Short-Term Temptations to Achieve
Long-Term Gains :
There are multi-million dollar businesses devoted to
motivating individuals to avoid temptations and
approach goals
• e.g.,
*financial stability
*investment strategies
*exercise (to think clearly)
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Emotion & Cognition - Collide
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• Multiple Selves
e.g., spending vs. saving
(Loewenstein, 1996)
Temporal Differences
e.g., Discounting à occurs when having something
now perceived as more valuable than having in
future vs. saving (financial)
(Loewenstein, 1996)
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Emotion & Cognition - Collide
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The delicate nature of
our memory …
Check out this demo.
(customized for you)
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Nils Olsen, copyright 2021
List 1 (% co
ect) List 2 (% co
ect) List 3 (% co
ect) List 4 (% co
ect) Overall %
gravel 0.96 dream 0.94 fur 0.81 stool XXXXXXXXXX
oad 0.75 drowse 0.72 quilt 0.68 upholstery XXXXXXXXXX
sand 0.68 rest 0.59 spongy 0.67 cushion XXXXXXXXXX
smooth 0.48 snore 0.52 tender 0.24 rung XXXXXXXXXX
edge 0.57 doze 0.33 satin 0.74 bench XXXXXXXXXX
coarse 0.64 wake 0.47 subdued 0.35 rocker XXXXXXXXXX
jagged 0.55 yawn 0.45 felt 0.22 wicker XXXXXXXXXX
ugged 0.67 nap 0.58 fluffy 0.41 relax XXXXXXXXXX
uneven 0.43 insomnia 0.59 blanket 0.53 sit XXXXXXXXXX
pe
les 0.74 bed 0.68 soothing 0.28 table XXXXXXXXXX
callous 0.79 pillow 0.59 hard 0.58 sofa XXXXXXXXXX
sandpaper 0.42 awaken 0.58 cotton 0.74 couch XXXXXXXXXX
harsh 0.67 comfort 0.48 downy 0.81 swivel XXXXXXXXXX
tough 0.79 peace 0.57 velvet 0.47 cozy XXXXXXXXXX
gentle 0.61 slumber 0.45 silk 0.72 desk XXXXXXXXXX
umpy 78 awake 0.72 mattress 0.64 seat XXXXXXXXXX
ough 0.45 sleep 0.48 soft 0.20 chair XXXXXXXXXX
False Memory Effect
(Data collected by Nils Olsen (2021)
eplication of: Roediger & McDermott, 1995)
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• Links to Decision Making:
Above is table of data for false memory demonstration
(that we ran in class). Table shows proportion of co
ect
ecalls for each word in each of four word-lists. Last
column (farthest to right) shows average across all four
lists. Words in each list are listed in the order (from 1 to 16)
in which they were presented (as Nils read them). Row of
proportions at bottom of table (in bold) contains the data for
the "lure" -- or critical (yet not presented) word for each
list. Amazingly these “lure” (decoy) words are recalled as
often (even more often) than many of the words that were
actually presented from the lists!
Nils Olsen, copyright 2021
False Memory Effect
(Data collected by Nils Olsen (2021)
eplication of: