Critical Managerial Decision Making: Exam #1

Steps to Making a "Rational" Decision

• Compute the Optimal Decision

• Define the Problem

• Identify the Criteria

• Generate Alternatives

• Rate Each Alternative on Each Criterion

Answer explanation

1. Define the problem

2. Identify the criteria

3. Weigh the criteria

4. Generate alternatives

5. Rate each alternative on each criterion

6. Compute the optimal decision

What is a major disadvantage of the rational decision-making process?

• high resource consumption

• relies on facts, data, and logical analysis rather than intuition or emotion

• high revenue

• informed decisions

Answer explanation

often assumes perfect information and unlimited time to analyze all options, which is unrealistic

Select the true statements about System 1 and System 2 Thinking

• intuitive thinking is quick, nonconscious, involuntary, and effortless whereas logical thinking is effortful, deliberate, pausing to think of self and environment, and carefully selecting a course of action

• logical thinking is quick, nonconscious, involuntary, and effortless whereas intuitive thinking is effortful, deliberate, pausing to think of self and environment, and carefully selecting a course of action

• we are much more likely to make judgment errors when relying on System 1 thinking, therefore for important decisions, we should ideally rely on System 2 thinking

• ideally we would use both systems of thought in tandem, but sometimes our System 2 thought fails to correct our faulty System 1 intuitions.

• we are much more likely to make judgment errors when relying on System 2 thinking, therefore for important decisions, we should ideally rely on System 1 thinking

Match the following

• Logical Thinking

• System 1 Thinking

• Automatic Thinking

• Intuitive Thinking

• Intuitive Thinking

• Logical Thinking

• Controlled Thinking

• System 2 Thinking

Prescriptive models

• methods for making optimal decisions, that is how decisions should be made

• people are not aware or choose not to use available information and depend on the behavior of others

• consider, and reflect on, how decisions are made

• tells us what we actually do, irrespective of whether it leads to an optimal outcome

• the approach we take discussing decision-making in class

Descriptive models

• methods for making optimal decisions, that is how decisions should be made

• people are not aware or choose not to use available information and depend on the behavior of others

• consider, and reflect on, how decisions are made

• tells us what we actually do, irrespective of whether it leads to an optimal outcome

• the approach we take discussing decision-making in class

Match the following

• Heuristics

• cognitive shortcuts that we use to make decisions

• Bounded rationality

• refers to decision-making processes that yield the optimal solution. However, we often fail to achieve optimal outcomes

• Rationality

• individuals are limited in the information they have, the cognitive limitations of their minds, and the finite amount of time they have to make a decision.

  Rather than maximizing our outcomes, we often satisfice

Match the following

• Availability heuristic

• we judge people according to the extend to which they match up with a previously formed stereotype

• Confirmation Heuristic

• using current moods or emotions that influence our decision making

• Representativeness Heuristic

• shortcut that relies on readily 'available' information, that is information available in memory

• Affect Heuristic

• we look for evidence that confirms our intuitions rather than evidence that refutes it

The mother of all biases

Match the following forms of Overconfidence

• Overplacement

• thinking you are better than you really are

• Overprecision

• falsely thinking that you are better than others

• Overestimation

• being too certain that your judgments and decisions are accurate