Decision making

Lecture 3. Problem Solving and Bounded Awareness

Instructor: Alina Gutoreva

Recap
Biases emanating from Heuristics:
1. Ease of recall 8. The confirmation trap
2. Retrievability 9. Anchoring
3. Insensitivity to base rates 10. Conjunctive- and disjunctive-
4. Insensitivity to sample size events bias
5. Misconceptions of chance 11. Overconfidence
6. Regression to the mean 12. Hindsight and the curse of
knowledge
7. The conjunction fallacy
Lecture concepts
• Perfect Rationality Model
• Bounded Rationality Model
Example

Air resistance, wind, and spin. Initial distance, velocity, projection angle
“Can it be rational not to use
information even when it is
available?”
To use Not to use
Knowledge is power (F. Bacon) There are situations, in which:
• Having more knowledge and • It is beneficial not to have
information is better than having information in the first place
less. • Deliberately not use available
• Using knowledge and information when making
information is better than not decisions
using it.
Example (cont)
Aspects of heuristics:
• It does not use all
information that is
potentially available
• No complex integration,
only one variable
considered
• Success of a strategy
depends on where and
how it is implemented
Models of Decision Making

Effective Decision

a timely decision that

meets a desired Perfect Rationality
objective and is Model
acceptable to those
individuals affected by it Bounded Rationality
Model
Garbage Can Model
 Pure rational choice theory is the theory about
decision making process of identifying a problem,
Perfect Rationality finding a solution, and making logical decisions. It
Model entails going through the available solution
options and selecting the optimal solution
without any limitations.

1. The outcome will be completely rational

2. The decision maker uses a consistent system of preferences
to choose the best alternative
3. The decision maker is aware of all alternatives
4. The decision maker can calculate the probability of success
for each alternative
 Bounded Rationality – a theory that suggests
that there are limits upon how rational a
Bounded Rationality decision maker can actually be. The limitation
Model factors include time, knowledge, and ability to
acquire knowledge

In his Nobel Prize–winning work, economist -psychologist Herbert Simon

argued that our decisions are bounded in their rationality.
According to the bounded rationality framework, human beings try to
make rational decisions, but our cognitive limitations prevent us from
being fully rational.
Decision-makers go for the acceptable solution as opposed to the best
solution.
Bounded Rationality
• The theory argues that we try to be rational and follow the rational
choice path
• But we are not clever enough and do not have all the available
information
• Despite our best efforts, we cannot be completely rational – our
rational capacity is limited or has boundaries
Bounded Rationality
• Not all alternatives are known
We tend only to look at a few (high, middle, low)
We also look at them in sequence (and are biased towards the first
thing we see)
This can bring biases – because we are constrained
Bounded Rationality
• Not all consequences are considered
We do not look at all consequences of alternatives
Usually we focus on a few and ignore others
We look for what suits our preconceptions ( more later)
We don’t look for all the information
Bounded Rationality
Not all preferences are used at the same time

We are not consistent or complete in our preferences

We are inconsistent and incomplete - our goals change over time, too
Bounded Rationality
• The rules in the real world are different from the world of theory
• We tend to look for what is good enough, rather than the best
possible action
• Rational choice theory has been adapted with the addition of the
concept of bounded or limited rationality
Satisficing and Maximizing
• Most rational decision making models assume that we will choose the
alternative with the highest expected return
• However, much research indicates that we tend not to do this -we
choose an alternative that meets or exceeds our target, but does not
necessarily maximize.
• This behavior is known as ‘satisficing’ –we satisfy our needs, but do
not always choose the option that maximizes return
 Bounded Rationality - a
Bounded Rationality theory that suggests that
Model there are limits upon how
rational a decision maker
can actually be
1. Managers suggest the first satisfactory alternative

Satisfice – to select the first alternative that is “good

enough,” because the costs in time and effort are too
great to optimize
 Bounded Rationality - a
theory that suggests that
Bounded Rationality
there are limits upon how
Model
rational a decision maker
can actually be

1. Managers suggest the first satisfactory alternative

2. Managers recognize that their conception of the world is
simple
3. Managers are comfortable making decisions without
determining all the alternatives
4. Managers make decisions by rules of thumb or
heuristics
Heuristics – shortcuts in decision
making that save mental activity
Satisficing vs Maximizing
• Consider hiring of employees
•Maximizing involves finding the best possible person to do the job
•Satisficing involves find someone who can do the job
•You try to maximize but tend to satisfice.
•Simple function of reality -you do the best you can
Attention and Time
• Time allocation is a crucial factor in decision making
•Decision quality is often determined by how much attention we pay to
an issue
•It is a key factor in understanding why we so often satisfice in our
decision making
•This factor alone greatly undermines the real world relevance of
rational choice models
Attention and Time
• Decision makers often do not pay enough attention to the attention
issue
•They focus on deadlines and the needs of others
•They are not good at planning –balancing short term with long term
•We tend to look at issues which need our attention reluctantly –we
put it off and ‘go with the flow’
Attention and Time
• Deciding what to focus on has costs, in time and money
•Organizations try to find ways to increase the number of things that
they can ensure get attention and get dealt with
•It is one of the central elements of senior management delegation
•We look to minimize costs per item to be dealt with by increasing the
amount of tasks which are routine and do not need decisions to be
made –it is why we develop policies and procedures
Satisficing and Search
• We are supposed to compare achievement to targets set
• We set aspiration levels –sales, profits and so on
• We are supposed to see how we achieve against these aspirations /
targets
• If we fail, we search for better ways to do things
• If we succeed, we move on –no further time is spent on the issue
• in fact, no matter the result, we tend to do this most times –assessing
performance against target is often the exception rather than the
norm
Satisficing and Search
• One way to look at targets is as ‘branch points’ in a continuous search
process
•If we do OK, we limit search
•If we do not, we assess options
•We also tend to look at things in sequence
•We look at one thing at a time –the first thing we look at it often the
one that gets the most attention
•We may miss more effective alternatives by this simple sequencing
process –if we look at the wrong thing first
Other Drivers of Search in
Decision Processes

• There are other determinants of attention and search effort in the

decision process -in addition to failure
•It may be driven by a desire to improve –this is one definition of
strategy –a search for how do things better
•It may be driven by success –we have delivered what we were asked
to, so we allocate attention to search for new things to do
Other Drivers of Search in
Decision Processes
• Finally, we tend to think of information ‘markets’ as demand driven
•We go looking for the information –we demand it
•But in some cases, the information comes to us –the supply requires
our attention
•The environment is not passive
 Garbage Can Model
Solutions

Choice
Garbage Can Model - Problems
opportunities
a theory that contends Participants

that decisions in
organizations are
random and unsystematic
Do you remember?

System 1 System 2
 System 1 and System 2
Thinking

System 1 Thinking System 2 Thinking

• Rapid response system • Thorough response system
• Doesn’t ‘feel like thinking’ • Active ‘thinking’

• Strength lies in working quickly • Strength: It deals with details

and needing less energy and effort and calculations, and rationality.
• Weakness: quick assessment and • Weakness: takes a lot of energy.
general rules can get things wrong Can’t afford all the time
Information Constraints
• As human decision makers we have limitations in processing
information

Attention Memory

Comprehension Communication
Attention
• The time we have and the ability to pay attention both have limits
• We can’t deal with everything at once
• There are too many messages and too much information which may
be relevant
• We make a decision on how to allocate our limited attention time and
span
Test Your Awareness
[Link]
Memory
• Both individuals and organizations are not good at remembering
• We don’t keep very good records
• We are not good at recording precedent unless forced
• Even if it is captured, we are not very good at recalling in detail either
as individuals and especially as organizations
Comprehension
• We are limited in our ability to comprehend
• We are not good at organizing, summarizing and using information
• We are particularly weak at seeing causation
• We find it hard to determine what is relevant and what is not
Communication
• We have great limitations in communicating what we know,
particularly technical / complex knowledge
• Specialization helps us to comprehend, but raises barriers to
communication outside our specialty
• Add in culture, generations, class and gender as further walls
Test Your Awareness
[Link]
• Did you notice anything unusual in the video?
Question
• Is it possible to control someone’s attention?
• What about predicting human Behaviour?
Exercise
• Without looking directly,
can you remember the
bottom right corner icon
on main menu of your
phone?
Exercise
• Check how accurate
you were
• Close it down
• What was the time?
hat time was it
Attention
• Process of concentrating on specific
features of the environment, or on
certain thoughts or activities
• Excluding other features of the
environment
Selective Attention
• Selective attention is the process of focusing on a
particular object in the environment for a certain
period of time, simultaneously ignoring irrelevant
information that is also occurring.
• Attention is a limited resource, so selective
attention allows us to tune out unimportant details
and focus on what really matters.
1. The "spotlight" model
• it proposes that visual attention works similar to that of a spotlight.
• Psychologist William James suggested that this spotlight includes a
focal point in which things are viewed clearly.
• The area surrounding this focal point, known as the fringe, is still
visible, but not clearly seen.
• Finally, the area outside of the fringe area of the spotlight is known as
the margin.
1. The "spotlight" model
2. "zoom-lens" model
While it contains all the same elements of the spotlight model, it also
suggests that we are able to increase or decrease the size of our focus
much like the zoom-lens of a camera.
However, a larger focus area also results in slower-processing since it
includes more information so the limited attentional resources must
be distributed over a larger area.
Selective attention
• At a gathering, you pay most attention to the person you're talking to --
attentional selection that is determined by physical attributes such as the
person's spatial location.
• At the same time, you are also attentive for people talking about you -- thus,
attentional selection is open to semantic information.
Watch videos
• [Link]
Attention and Visual Perception
• Inattentional blindness is the failure to notice a fully-visible, but
unexpected object because attention was engaged on another task,
event, or object.

• Change blindness is the failure to notice an obvious change that are

easily seen once attention is paid.

• These failures therefore cannot be due to physical factors such as

poor visibility; perceptual factors must be responsible
Inattentional blindness
All of the following criteria must hold to classify a failure of awareness
as inattentional blindness:
1. Observers fail to notice a visual object or event
2. The object or event is fully-visible and observers readily see it if they
are looking for it
3. The failure to notice results from engagement of attention on other
aspects of the display and not from aspects of the visual stimulus
itself
4. The object or event is unexpected
Examples
- Inattentional blindness may be an issue:
- A driver on their cellphone failing to notice
another car in front of them.
- An airplane pilot failing to notice another plane
on the runway as he is focused on his controls.
- You when failing to notice major blooper in
historical movie, like an airplane appearing in
the background or Starbucks cup
- Completely not noticing something that your
friend / partner told you while you were paying
attention to something else.
Change blindness
- We often fail to notice very obvious changes in our environment, such
as people changing.
- We often implicitly know that something strange is going on, but we fail to
consciously notice environmental changes.
- The more subtle the change, the less likely we are to notice it.
- However, change blindness does not only occur for visual stimuli, but
for a variety of important behaviors.
For example
- The auditor of a company may approve some statements that stretch the
boundaries of ethical standards one year.
- The next year, the auditor may approve statements that are clearly unethical and possibly
illegal.
- However, if the company changed from being completely ethical to performing blatantly
illegal reporting practices the next year, the auditor may have been more likely to notice
the change in reporting standards and to report the company for its illegal practices.
- Much like the accountant, we too are prone to a slippery slope of ethical
behavior where we fail to notice that our behavior has become unethical over
time because a series of decisions where we slightly bend an extra rule or two
may accumulate to a point where we are blatantly breaking all of the rules,
but we fail to notice that we are doing so
Despite similarities, each type of
blindness has a unique background
Change blindness Inattentional blindness
• Is a failure to see something present • Is a failure to notice something
in a display from one moment to the different about a display
next
• Does not require memory
• Need to compare two displays to
spot the change: current state of a • A failure to see the object
display to an earlier state stored in altogether
memory
• Due to distraction or attentional
• Involves memory failures
• A change – it was not present before
and now it is
Focalism and the Focusing Illusion
• Focalism - is the tendency to focus too much on a single event and to ignore
other events that may be happening concurrently.
• Overestimation of our emotional reactions
• When we are experiencing emotions about a current or anticipated event, we tend to
think just about that event and forget about the other things that happen
• Focusing on specific events
• Using it
Focus on one thing when persuading and the other person may forget other
factors.
• Defending
Keep your mind open about the multiple causes of how you feel.
Divided attention
• is a mental state in which a person focuses on multiple things at once
• This ability is limited, which has an impact on how much we can
process at once
• Shifting attention between multiple stimuli

• Practice enables people to simultaneously do two things

which at first were difficult
• E.g., driving and singing
• After hours of practice, you can drive and sing.
Connect the Dots
• Without lifting your pencil (or pen) from a piece of paper, draw four
(and only four) straight lines that connect all nine dots shown here:
 Connect the Dots

What Most People Do The Correct Solution

people tend to impose boundaries on

themselves when attempting to solve
the problem

Example of Bounded Awareness

Do you know?
• Who is Bernie Madoff ?
Bounded Awareness
• Over the course of 3 decades, Bernie Madoff developed an elaborate
Ponzi Scheme that allowed him to steal from investors while making a
handsome profit and making it appear as if his funds were earning
abnormally high returns.
• [Link]

• Why did nobody notice earlier?

Bounded Awareness
• However, there were several warning signs that people should have
noticed before Madoff’s scheme cracked.
- Many of the managers of Madoff’s feeder funds saw some hints that there
was something wrong, but they didn’t have the motivation to investigate
any further.
- Investors, government officials, and investment bankers also failed to
notice that something was wrong.
- The CEO of Access International Advisers and Marketers also continued to
invest in Madoff and to refer his clients to Madoff despite repeated
warnings from outsiders and evidence that Madoff’s returns were not
possible to achieve
Bounded Awareness
- Just like the people who failed to notice the warning signs or to take
action against Madoff, we often fail to notice important details.
- Much like we use heuristics to simplify the problem-solving process,
we selectively filter out some of the information available to us in
order to prevent ourselves from being overwhelmed with every tiny
detail that we encounter.
- This tendency to fail to notice important details is referred to as
bounded awareness.
Bounded Awareness in Groups
• Much decision-making occurs in groups.
• Mentioned information is considered.
• Groups focus on shared information.
• Groups should emphasize unique information.
Bounded Awareness in Groups
- Groups tend to consider information that is explicitly mentioned and shared by individuals.
- As a result, groups should allow people to pool information together to gather all of the
relevant information about a problem before arriving at an optimal solution.
- However, people often fail to share the information that they uniquely hold and
information that all group members share tends to be discussed.
- This results in groups making decisions that drastically differ from the decisions that
individuals with full information would make.
- When information is split among the individuals within a group, groups make very
different decisions than groups where all members have the same information about a
problem.
- In order to capitalize on the full potential of groups to allow individual members to pool
unique information so that the group can gather all of the relevant information to solving a
problem, groups should emphasize the value of unique information and identify experts on
particular topics who are responsible for sharing information that they are the most likely
to uniquely hold about a problem.
Bounded Awareness in Strategic
Settings
• Bounded awareness of rules
• Bounded awareness of others’ decisions

- Two ways that we often suffer from bounded awareness in strategic

settings:
- Our knowledge of subtle changes in the rules to games.
- Our consideration of the decision making process of others.
Summary
- Bounded awareness results in
- Fail to make decisions that align with logic.
- Final outcomes that drastically vary from what logic would dictate.
- Overall, bounded awareness is the tendency to fail to notice specific
information in a particular domain that may better inform one’s
decisions.
- By better understanding when one is the most prone to experiencing
bounded awareness, he or she can best avoid the pitfalls of bounded
awareness.