Samenvatting Boek BFRE
Chapter 1 Introduction to Managerial Decision Making
Anatomy of decisions
Judgement: cognitive aspects of decision-making process. Rational decision-making process:
1. Define problem: not in terms of solutions, not missing big problem, not the
symptoms but the actual problem you’ll need to solve.
2. Identify criteria
3. Weigh criteria: in dollars, points, scoring system.
4. Generate alternatives: only alternatives where value outweighs costs
5. Rate each alternative on each criterion
6. Compute the optimal decision: by multiplying ratings in step 5 by weight of each
criterion, add up weighted rations across criteria for alternatives, choose highest
sum of ratings.
System 1 and system 2 thinking
System 1: intuitive system, fast, automatic, effortless, implicit, emotional.
System 2: reasoning is slower, conscious, effortful, explicit, logical – step system. Rationality:
optimal result, ‘should’ instead of ‘is’. Rationality is the prescriptive model.
- Prescriptive model: methods for making optimal decisions.
- Descriptive model: how decisions are actually made.
- Helps us see why we make mistakes
- Optimal decision depends on behavior of others
- People don’t follow advice
Why we don’t think rationally
Bounded rationality: satisfice. Time and cost constraints. Choose sufficient solution, not
the best.
Bounded self-interest
Human judgement deviates from rationality (sufficing, bounded rationality). Heuristics:
simplifying strategies (rules of thumb).
Bounded willpower is bounded: greater weight to present concerns than future concerns
(e.g. not saving enough)
Bounded awareness: focusing biases, missing the obvious
Bounded ethicality: we’re unaware that our ethics are limited
Types of heuristics
Availability heuristic: available in memory. Easier to recall frequent events, so accurate
judgement. But factors like vividness influence it.
Representativeness heuristic: look for traits that fit previously formed stereotypes.
Perhaps good first cut to find good options, but can lead to discrimination. (Search for
nanny)
Confirmation heuristic: always at least 4 situations to consider when assessing association
between 2 events (marihuana – crime). We intuitively use selective data. Anchoring,
hindsight bias.
Affect heuristic: system 1 unconscious, emotional (=affective) evaluations. When time
constraints.
1
, Samenvatting Boek BFRE
Chapter 2: Overconfidence
Overconfidence effects are most potent, pervasive, pernicious biases. Wars, stock market
bubbles, strikes etc. Don’t double check opinions or correct flaws.
Overprecision
Too sure our judgements are correct and thus not testing our assumptions. Overconfident in
the precisions of our beliefs. So, when we’re asked to predict something, we take a range
that’s too small because we’re sure we’re right. Even when we’re experts we’re too
confident, make our ranges so small the result is outside of it. People act as if they know the
truth. E.g. scientists’ overprecision regarding climate change (it’s certainly happening, but
none of the scientists’ confidence intervals overlap); pilots who crash because they think
they know better. Causes:
Desire to relieve internal dissonance. When getting advice, we prefer hearing something
that matches our own views, while different perspectives would be better for us.
Those who express confidence get trust, credibility, status, more persuasive. E.g. Bush.
Consequences of overprecision: we’re often in error but not in doubt about it. Because
we’re sure we’re right we don’t take advise. Naive realism: way we see the world is the right
view. If we’d be better at acknowledging own imperfections, choices would be better: no
more biases and imperfections.
Overestimation
Think you’re better than you actually are.
Self-enhancement: view ourselves positive instead of accurately. Groups we belong to are
better than other groups. Overestimate own performance, abilities, talent.
Illusion of control: think you have more control than you do. Especially when they have
little control (pick own lottery numbers, health)
Planning fallacy: overestimate speed at which we will complete projects/tasks. Optimism.
Optimistic biases: overestimate rosiness of our future. Feels good. Moment of truth: then
we lower expectations to prevent disappointments. Start off full of hope for future, at
moment reduce expectations
Overestimation
We think we’re better, smarter and more popular than we really are. Makes us believe we
have more control than we do. We’re better than others. Makes us believe we deserve
more, we’ll win lawsuits, have “unique” talents. Use wrong reference groups. Many failed
starting businesses.
Overplacement
Falsely think we rank higher than others (in competitive context). Arrogant, careless, self-
centered. Fool ourselves into thinking we’re better than we are. Try to be realistic.
2
Chapter 1 Introduction to Managerial Decision Making
Anatomy of decisions
Judgement: cognitive aspects of decision-making process. Rational decision-making process:
1. Define problem: not in terms of solutions, not missing big problem, not the
symptoms but the actual problem you’ll need to solve.
2. Identify criteria
3. Weigh criteria: in dollars, points, scoring system.
4. Generate alternatives: only alternatives where value outweighs costs
5. Rate each alternative on each criterion
6. Compute the optimal decision: by multiplying ratings in step 5 by weight of each
criterion, add up weighted rations across criteria for alternatives, choose highest
sum of ratings.
System 1 and system 2 thinking
System 1: intuitive system, fast, automatic, effortless, implicit, emotional.
System 2: reasoning is slower, conscious, effortful, explicit, logical – step system. Rationality:
optimal result, ‘should’ instead of ‘is’. Rationality is the prescriptive model.
- Prescriptive model: methods for making optimal decisions.
- Descriptive model: how decisions are actually made.
- Helps us see why we make mistakes
- Optimal decision depends on behavior of others
- People don’t follow advice
Why we don’t think rationally
Bounded rationality: satisfice. Time and cost constraints. Choose sufficient solution, not
the best.
Bounded self-interest
Human judgement deviates from rationality (sufficing, bounded rationality). Heuristics:
simplifying strategies (rules of thumb).
Bounded willpower is bounded: greater weight to present concerns than future concerns
(e.g. not saving enough)
Bounded awareness: focusing biases, missing the obvious
Bounded ethicality: we’re unaware that our ethics are limited
Types of heuristics
Availability heuristic: available in memory. Easier to recall frequent events, so accurate
judgement. But factors like vividness influence it.
Representativeness heuristic: look for traits that fit previously formed stereotypes.
Perhaps good first cut to find good options, but can lead to discrimination. (Search for
nanny)
Confirmation heuristic: always at least 4 situations to consider when assessing association
between 2 events (marihuana – crime). We intuitively use selective data. Anchoring,
hindsight bias.
Affect heuristic: system 1 unconscious, emotional (=affective) evaluations. When time
constraints.
1
, Samenvatting Boek BFRE
Chapter 2: Overconfidence
Overconfidence effects are most potent, pervasive, pernicious biases. Wars, stock market
bubbles, strikes etc. Don’t double check opinions or correct flaws.
Overprecision
Too sure our judgements are correct and thus not testing our assumptions. Overconfident in
the precisions of our beliefs. So, when we’re asked to predict something, we take a range
that’s too small because we’re sure we’re right. Even when we’re experts we’re too
confident, make our ranges so small the result is outside of it. People act as if they know the
truth. E.g. scientists’ overprecision regarding climate change (it’s certainly happening, but
none of the scientists’ confidence intervals overlap); pilots who crash because they think
they know better. Causes:
Desire to relieve internal dissonance. When getting advice, we prefer hearing something
that matches our own views, while different perspectives would be better for us.
Those who express confidence get trust, credibility, status, more persuasive. E.g. Bush.
Consequences of overprecision: we’re often in error but not in doubt about it. Because
we’re sure we’re right we don’t take advise. Naive realism: way we see the world is the right
view. If we’d be better at acknowledging own imperfections, choices would be better: no
more biases and imperfections.
Overestimation
Think you’re better than you actually are.
Self-enhancement: view ourselves positive instead of accurately. Groups we belong to are
better than other groups. Overestimate own performance, abilities, talent.
Illusion of control: think you have more control than you do. Especially when they have
little control (pick own lottery numbers, health)
Planning fallacy: overestimate speed at which we will complete projects/tasks. Optimism.
Optimistic biases: overestimate rosiness of our future. Feels good. Moment of truth: then
we lower expectations to prevent disappointments. Start off full of hope for future, at
moment reduce expectations
Overestimation
We think we’re better, smarter and more popular than we really are. Makes us believe we
have more control than we do. We’re better than others. Makes us believe we deserve
more, we’ll win lawsuits, have “unique” talents. Use wrong reference groups. Many failed
starting businesses.
Overplacement
Falsely think we rank higher than others (in competitive context). Arrogant, careless, self-
centered. Fool ourselves into thinking we’re better than we are. Try to be realistic.
2
