1. Values, Choices and Frames Session 10 Decision Making and Risk Sp2006

2. Role of Memory and Processing Biases in Decision Making

3. In-Class Exercise – Generating Probability Estimates Generate examples of probability estimation situations in which the estimates could be biased (previous lecture), and come up with ways to correct such estimates. Output:  A table with three columns, first column, the name of the bias, second column, a business situation which exemplifies the bias (this has to be somewhat descriptive), third column that makes specific recommendations about how the bias can be avoided.

4. New Product Development Situation The product development team for NexTech Inc., a toy manufacturer and marketer is in a new products ideation meeting featuring several participants. The goal is the following:  Identify as many new product ideas that will go into the ‘decision option’ pool.  They have to come up with decision criteria, and importance assessed to each criterion thereof, that will help them evaluate the decision options they generate. How should they go about the task?  Specifically, what would limit/expand the number of new ideas generated?  What would affect their ability to go closer to/away from the true decision criteria?

5. Part-List Cueing Effect Time 1:  Learn a list of items in a category Time 2:  Unrelated activity Time 3:  Split into two groups. One group studies a random selection of half the items of again (Re-Study Group) The other group does not (No Study Group). Time 4:  Unrelated activity Time 5:  Both groups asked to recall as many items from the original list. Results:  For items studied at time 3 Re-Study Group > No Study Group  For items not studied at time 3 Re-Study Group < No Study Group

6. Part-List Cueing If there are “n” options in an option space, S. Let r n be the number of options recalled from memory; r n ≤ n. If a few options, say, c, are provided as a memory cue, then, r c, the number of items recalled from S when ‘c’ items are provided, will be such that:  r c << r n - c.

7. How Structure Affects Importance of Decision Criteria Problems Percentage Choosing Each Answer Open QuestionClosed Question Quality of Public Schools Legalized Abortion Energy Shortage All Other Responses 1 0 98 32 14 8 6 40 Source: Schumann and Scott (1987)

8. What is Important and What is not? Highly affected by availability. Factors that are listed, get inflated importance scores.  Importance of factors generated by pulling from memory tends to correlate better with true importance. Take away?  For idea generation  For importance assessment

9. Elementary Information Processing Model Input Cognitive and Emotional Processes Output

10. What you remember from a list? Time 1:  Learn a list of items in a category Time 2:  Unrelated activity Time 3:  Recall as many items from the original list.

11. What factors will Affect What is Recalled? Vivid items Items that came early on in the list. Items that came toward the end of the list. Self-relevant items. Mood-congruent recall.

12. Memory Biases in Information Processing Input Cognitive and Emotional Processes Output Vividness Self-relevance Primacy-Recency Mood Congruent Recall

13. Simulating Competitor Behavior Company A is trying to assess risk factors for success of a product. It is also concerned about the moves of Company B. How would their risk estimates vary? How would their ability to process risk increasing/decreasing factors vary?

14. Some Issues when Thinking of Others’ Risk Self-Other discrepancy in risk estimates  Vague competitor, i.e., ‘the competition’ tend to be judged more unfavorably than one’s own firm behavior, success probability etc. Individuate ‘the competition’ to a ‘particular competitor’  Same thing applies to ‘the customer’.  It often arises from: inability to visualize risk increasing factors being realized for one’s own firm, and risk decreasing factors being realized for competing firm. Selective memory for risk decreasing factors for one’s firm and risk increasing factors for competitor.

15. Dizziness and Brain Tumor Which cells of the table are needed in order to determine whether dizziness is associated with brain tumors in this sample of people? (Check all that apply.) Upper Left Lower Left Upper Right Lower Right According to the data in the table, is dizziness associated with brain tumors? Yes No Not sure

16. What Information is Needed for Assessing Correlation ? Percent indicating quadrant for which information is needed

17. Illusory Correlation? Percent indicating absence/presence of a relationship between Brain Tumor and Dizziness

18. SuperTire Discounters Tire A: 40,000 mile warranty, $60. Tire B: 50,000 mile warranty, $75. Without changing the warranty and price (or any other attribute) of Tires A and B, how can one affect market share of Brand A?

19. Decision before Decision One group gets to choose between: Tire A’:55,000 and $85 Tire B’:75,000 and $91 Another group gets to choose between: Tire A’’:30,000 and $25 Tire B’’:35,000 and $49 Now both groups choose between: Tire A:40,000 and $60 Tire B:50,000 and $75

20. Background Tradeoff Contrast Effect Pre-decision choice:  Big versus small bang for the buck Very high increase in value for unit increase in money compared to the Target choice set:  Tradeoff functions will be contrasted. With big bang for buck as the background, the increase in quality for money in the target set looks anemic by contrast, so choice is for the low quality low price brand. With small bang for buck in the background, the increase in quality for money in the target set looks very good by contrast, so choice is for the high quality high price brand.

21. Local Contrast Effect Suppose people are trying to choose between: Tire A:40,000 and $60 Tire B:50,000 and $75 Introduce Tire A’ which is inferior to Tire A, say, 35,000 and $60. Tire A’ is dominated by Tire A, but not by Tire B. A significantly greater proportion choose Tire A when the choice is A, A’ and B, than when the choice is A and B.

23. Review – Session 10 (April 4) Structuring the Decision  Memory Biases Part List Cuing – How available stimuli limit what is retrieved from memory.  Unstructured – private  Unstructured – public  Structured – public/private Inflation of Importance  Context of discovery/confirmation Primacy and Recency  Vividness Self-relevance Mood-congruent recall  Processing Biases Self-other discrepancy in risk estimates, ability to visualize risk increasing and decreasing factors, ability to use them Illusory correlation. Value and Choices  Value Maximization Independence of Irrelevant Alternatives  Tradeoff Contrasts Background Contrast Local Contrast