Decision making

Decision-making refers to the cognitive process of selecting a course of action from

multiple alternatives. It involves evaluating information, assessing potential outcomes,
weighing risks and benefits, and making judgments to choose the most suitable option.
Decision-making is influenced by factors such as individual goals, available information,
past experiences, and cognitive biases.
• What a Good Decision Requires
1.Clear Objectives: Understanding the goal or purpose of the decision.
2.Relevant Information: Gathering accurate and sufficient data to evaluate options.
3.Critical Thinking: Analyzing alternatives logically without being swayed by biases or
emotions.
4.Risk Assessment: Considering potential risks and benefits of each option.
5.Flexibility: Being open to new information and revising choices if necessary.
6.Confidence in Execution: Believing in the chosen path and being committed to its
implementation.
Phases of decision making
1. Setting Goals- The process starts with understanding the decision
maker’s goals, which stem from their future plans, principles, values, and
priorities. Goals shape the decision-making process by answering the
question: "What am I trying to accomplish?“
2. Gathering Information
• Before making a decision, individuals collect information on:
• The options available.
• The consequences of each option, both short- and long-term.
• How options affect others or the decision maker's future choices.
The complexity of the decision may require consulting experts, peers, or
self-reflection to clarify criteria (e.g., developing a wish list for a decision).
3. Structuring the Decision
• This phase involves organizing the information gathered, especially when:
• There are numerous options and criteria.
• Decision-makers must systematically compare their options against criteria.
For example, when selecting a college major, students evaluate multiple criteria (e.g., interest in
material, career prospects) across several options.
4. Making a Final Choice
• The decision maker selects an option based on the structured information. This phase may
include:
• Deciding when to stop gathering information.
• Prioritizing reliable and relevant data.
The process ranges from simple methods (e.g., flipping a coin) to more analytical approaches.
5. Evaluating
• The final phase involves reflecting on the decision-making process:
• What worked well?
• What didn’t work?
The goal is to identify lessons for future decisions and refine strategies for similar tasks.
Cognitive Bias of Availability in Decision Making
• The availability heuristic is a cognitive bias where people make decisions or
judgments based on how easily examples come to mind. If something is more
readily recalled, it is perceived as more frequent, probable, or important. This
heuristic often leads to errors because it relies on memory, which can be
influenced by factors like recency, vividness, and personal experiences.
• Mechanism of the Availability Bias
1.Ease of Retrieval: Events that are easier to recall or imagine are perceived as
more likely or significant.
2.Emotional Impact: Dramatic or emotionally charged events are more memorable
and influence decision-making disproportionately.
3.Recency Effect: Recent events are more available in memory and can overshadow
older, less vivid events.
4.Media Influence: Information heavily covered in the media is more available in
people's minds and can distort perceptions of reality.
• Examples of Availability Bias in Decision Making
• 1. Risk Perception
• Scenario: A person hears about a plane crash on the news. Despite statistics showing air travel is much safer
than driving, they decide to cancel their flight and drive instead.
• Explanation: The vividness and emotional weight of the plane crash story make it more "available" in their
memory, leading them to overestimate the likelihood of a crash.
• 2. Health-Related Decisions
• Scenario: After a coworker is diagnosed with a rare disease, an individual becomes convinced they might have
the same illness and undergoes unnecessary medical tests.
• Explanation: The rare disease becomes more salient and feels more probable because of its personal relevance
and the recent encounter.
• 3. Financial Decisions
• Scenario: An investor recalls recent success stories of people who invested in cryptocurrency and decides to
put all their savings into it without researching the risks.
• Explanation: Positive stories are more accessible and overshadow statistics or cases of financial losses.
• 4. Everyday Life Decisions
• Scenario: A person avoids swimming in the ocean after watching a shark attack movie, even though the
probability of a shark attack is extremely low.
• Explanation: The vivid imagery of the attack in the movie creates an exaggerated perception of danger.
Consequences of Availability
Bias
1.Distorted Probability Estimates: People overestimate the likelihood
of dramatic but rare events (e.g., terrorist attacks) and underestimate
common risks (e.g., car accidents).
2.Suboptimal Decisions: Resources may be allocated inefficiently due
to misjudged priorities (e.g., overpreparing for unlikely events).
3.Emotional Stress: Unfounded fears or anxieties may develop based
on vivid but unlikely scenarios.
Cognitive Bias of Representativeness Heuristic in Decision Making

• The representativeness heuristic is a cognitive bias where individuals judge the

likelihood or probability of an event based on how much it resembles or is
representative of a prototype or stereotype they have in mind. This heuristic often
leads to errors because it disregards important statistical information, such as base
rates and sample sizes.
• Mechanism of the Representativeness Heuristic
1.Similarity to Prototype: People assess probability based on how closely something
matches a category or stereotype, ignoring actual probabilities.
2.Neglect of Base Rates: General information about frequency or likelihood is often
overlooked in favor of specific details.
3.Insensitivity to Sample Size: People may assume small samples are as
representative of the population as larger ones.
4.Misunderstanding Randomness: Events that appear random or follow patterns
perceived as typical are incorrectly judged as more likely.
• Examples of Representativeness Heuristic in Decision Making
• 1. Stereotyping in Hiring
• Scenario: A hiring manager assumes a candidate who majored in philosophy and has an interest in social justice activism is more
likely to be a community organizer than a corporate analyst.
• Explanation: The candidate's characteristics resemble the stereotype of a community organizer, so the manager ignores the base
rate that corporate analysts are far more common than community organizers.
• 2. Medical Diagnosis
• Scenario: A doctor diagnoses a young, physically active patient with a rare disease commonly associated with athletes, ignoring
the fact that statistically, the disease is extremely rare across all populations.
• Explanation: The patient "fits the stereotype" of someone who might have the disease, leading the doctor to overlook the low
overall probability.
• 3. Lottery Beliefs
• Scenario: A person believes the sequence "1, 2, 3, 4, 5, 6" in a lottery is less likely to occur than "12, 26, 34, 45, 56, 78."
• Explanation: The second sequence appears more random or representative of typical lottery outcomes, even though both are
equally probable.
• 4. Gambler’s Fallacy
• Scenario: In a coin toss game, after seeing "heads" five times in a row, a person believes "tails" is now more likely.
• Explanation: They assume the outcomes should balance to represent randomness, disregarding the fact that each toss is
independent.
• 5. Legal Decision Making
• Scenario: A juror assumes a defendant is guilty because their demeanor fits the stereotype of a "guilty person," despite evidence
showing a lack of motive or opportunity.
• Explanation: The juror relies on representativeness, ignoring logical inconsistencies in the case.
Framing Effects in Decision Making

• The framing effect is a cognitive bias where the way information is presented
(the "frame") influences the choices people make, even when the underlying
information is identical. This bias demonstrates that human decisions are not
only influenced by objective data but also by how that data is communicated.
• Framing effects often exploit people's tendency to avoid losses (loss aversion) or
seek gains, as highlighted in prospect theory by Kahneman and Tversky (1979).
1. Positive vs. Negative Framing
• The same information can lead to different decisions depending on whether it is
presented positively or negatively.
• Example:
• Positive Frame: "This surgery has a 90% success rate."
• Negative Frame: "This surgery has a 10% failure rate."
• Outcome: People are more likely to opt for the surgery when presented with the positive
frame, even though both statements describe the same probability.
• Risky Choice Framing
• People tend to prefer certain outcomes when options are framed in
terms of gains and take risks when framed in terms of losses.
• Example (Classic "Asian Disease Problem"):
• Gain Frame:
• Option A: "200 people will be saved."
• Option B: "There is a 1/3 chance that 600 people will be saved and a 2/3 chance that no
one will be saved."
• Outcome: Most choose Option A (certainty).
• Loss Frame:
• Option A: "400 people will die."
• Option B: "There is a 1/3 chance that no one will die and a 2/3 chance that 600 people
will die."
• Outcome: Most choose Option B (risk).
Attribute Framing
• Evaluations of an object, product, or decision vary depending on how a single attribute is
framed.
• Example:
• Positive Frame: "80% lean beef."
• Negative Frame: "20% fat beef."
• Outcome: Consumers perceive the first as healthier or more desirable, even though both describe
the same product.

Goal Framing
• The emphasis on the benefits of performing a behavior or the costs of not performing it
influences compliance.
• Example:
• Positive Frame: "If you exercise regularly, you’ll improve your heart health."
• Negative Frame: "If you don’t exercise regularly, your risk of heart disease increases."
• Outcome: The negative frame is often more persuasive for behaviors associated with avoiding
harm.
Anchoring in Decision Making

• Anchoring is a cognitive bias where individuals rely heavily on the first

piece of information they receive (the "anchor") when making decisions.
This initial reference point significantly influences subsequent judgments
and decisions, even if the anchor is arbitrary or unrelated to the actual
decision.
• How Anchoring Works
1.Initial Anchor: An anchor provides a starting point for decision-making or
evaluation.
2.Adjustment: People make adjustments from the anchor to arrive at their
final decision, but these adjustments are often insufficient.
3.Cognitive Bias: The anchoring effect occurs because the anchor serves as
a psychological benchmark, and people are reluctant to stray far from it.
Examples of Anchoring in Decision Making
• 1. Pricing and Sales
• Scenario: A store lists a shirt at ₹2,000 but marks it down to ₹1,200, labeling it as a "limited-time offer."
• Outcome: Customers perceive ₹1,200 as a good deal compared to the anchor price of ₹2,000, even if
₹1,200 is above the item's market value.
• 2. Negotiations
• Scenario: In a salary negotiation, the employer starts with an offer of ₹30,000 per month.
• Outcome: The employee's counteroffer is likely influenced by the anchor of ₹30,000, even if they
initially aimed for ₹40,000.
• 3. Real Estate
• Scenario: A realtor lists a house for ₹80 lakh, though its market value is ₹65 lakh.
• Outcome: Buyers anchor their negotiation around ₹80 lakh and end up offering closer to that price,
believing it reflects the house's worth.
• 4. Estimations
• Scenario: When asked how many countries are in Africa, a participant who first sees the number "50"
(anchor) is more likely to estimate closer to 50, regardless of its accuracy.
• Outcome: The initial number influences the participant’s estimate, even if it is unrelated.
Sunk Cost Effect in Decision Making

• The sunk cost effect refers to the tendency to continue investing time, money, or
effort into a project or decision based on the resources already committed, rather
than future benefits or costs. This bias often leads to irrational decision-making
because past costs are irrecoverable and should not influence current or future
decisions.
• How the Sunk Cost Effect Works
1.Initial Investment: Resources (time, money, or effort) are invested in a decision or
project.
2.Emotional Attachment: Individuals feel committed to seeing the project through,
regardless of its viability.
3.Escalation of Commitment: Instead of cutting losses, people continue investing
more resources, fearing the loss of their initial investment.
• This is rooted in psychological factors like loss aversion, fear of failure, and
cognitive dissonance (discomfort in abandoning a prior decision).
• Examples of Sunk Cost Effect
• 1. Personal Relationships
• Scenario: A person remains in a toxic relationship because they have already invested several years into it.
• Outcome: They ignore the lack of future happiness and stay committed to avoid "wasting" the time they've spent.
• 2. Financial Investments
• Scenario: An investor continues to pour money into a failing stock because they have already lost ₹10,000.
• Outcome: Instead of cutting losses, the investor risks further losses in the hope of eventual recovery.
• 3. Projects and Workplaces
• Scenario: A company continues funding a failing project because it has already spent millions on it.
• Outcome: Resources are wasted, and the company may miss more profitable opportunities.
• 4. Entertainment Choices
• Scenario: Someone sits through a boring movie at the theater because they already paid for the ticket.
• Outcome: Instead of leaving and using their time better, they endure the dissatisfaction to justify their
expenditure.
• 5. Education Decisions
• Scenario: A student continues in a degree program they dislike because they have already completed two years.
• Outcome: They ignore their lack of interest or career prospects in the field to avoid "wasting" the prior effort.
Illusory Correlation in Decision Making

• Illusory correlation refers to the cognitive bias where people perceive

a relationship between two variables or events even when no such
relationship exists, or when the relationship is weaker than assumed.
This bias can lead to faulty judgments and decisions by associating
events or characteristics based on coincidence or prior beliefs rather
than evidence.
• Examples of Illusory Correlation in Decision Making
• 1. Stereotyping in Recruitment
• Scenario: A manager believes that younger candidates are better at adapting to technology.
• Outcome: They favor younger applicants without evidence that age correlates with tech skills, potentially
overlooking qualified older candidates.
• 2. Superstitions
• Scenario: An athlete always wears a "lucky" jersey, believing it improves performance.
• Outcome: The perceived connection between the jersey and success persists, even though performance is based on
skill and preparation.
• 3. Healthcare Decisions
• Scenario: A person believes taking vitamin supplements prevents colds because they once avoided getting sick after
starting vitamins.
• Outcome: They continue to buy supplements despite a lack of scientific evidence supporting the correlation.
• 4. Criminal Profiling
• Scenario: A security officer believes individuals wearing hoodies are more likely to commit crimes.
• Outcome: Increased scrutiny of people wearing hoodies leads to confirmation bias, reinforcing the false
association.
• 5. Consumer Behavior
• Scenario: A customer thinks a higher price always indicates better quality due to occasional positive experiences.
• Outcome: They repeatedly choose expensive products, ignoring cheaper but equally good options.
Hindsight Bias in Decision
Making
• Hindsight bias is the tendency to believe, after an event has occurred, that
the outcome was predictable or inevitable, even when there was little or no
basis for predicting it beforehand. This bias can distort how decisions are
evaluated and impact future decision-making processes.
• How Hindsight Bias Works
1.Outcome Knowledge: Once the outcome of an event is known, people
overestimate their ability to have predicted it beforehand.
2.Cognitive Distortion: Memories of past predictions are reshaped to align
with the actual outcome.
3.Simplification of Complexity: The complexities and uncertainties of the
situation are ignored, making the outcome seem obvious in retrospect.
• Examples of Hindsight Bias in Decision Making
• 1. Business Decisions
• Scenario: After a startup fails, investors claim they "knew" the business model was flawed from the beginning.
• Outcome: This hindsight bias ignores the genuine uncertainties that existed at the time of investment.
• 2. Medical Judgments
• Scenario: A doctor reviews a patient’s misdiagnosis and concludes, “It should have been obvious that the
symptoms pointed to this disease.”
• Outcome: The doctor fails to acknowledge the ambiguity of symptoms at the time of diagnosis.
• 3. Political Events
• Scenario: After an election result, people claim they "always knew" a particular candidate would win, even if polls
suggested otherwise.
• Outcome: The complexity and unpredictability of voter behavior are minimized.
• 4. Financial Markets
• Scenario: After a stock market crash, analysts assert that the downturn was "clearly predictable" based on
economic trends.
• Outcome: They overlook the uncertainties and conflicting signals that preceded the crash.
• 5. Personal Decisions
• Scenario: After a relationship ends badly, a person claims they "saw the red flags from the start."
• Outcome: The individual may revise their memory of events to fit the unfavorable outcome.
Confirmation Bias in Decision Making

• Confirmation bias is the tendency to seek, interpret, and remember

information that confirms one’s preexisting beliefs, while ignoring or
downplaying evidence that contradicts them. This cognitive bias can
lead to flawed decisions, as it prevents individuals from objectively
analyzing all relevant information.
• Examples of Confirmation Bias in Decision Making
• 1. Hiring Decisions
• Scenario: An employer believes that candidates from a particular university perform better.
• Outcome: They focus on positive attributes of applicants from that university while ignoring shortcomings, potentially
overlooking better candidates from other institutions.
• 2. Investment Choices
• Scenario: An investor believes a specific company is destined for success.
• Outcome: They seek only favorable financial reports and dismiss warnings of potential risks, leading to poor investment
outcomes.
• 3. Medical Diagnoses
• Scenario: A doctor forms a preliminary diagnosis based on a patient’s initial symptoms.
• Outcome: The doctor may give more weight to test results supporting the initial diagnosis and overlook contradictory
findings, risking a misdiagnosis.
• 4. Political Views
• Scenario: A person with strong political opinions follows news sources that align with their views.
• Outcome: They reinforce their beliefs and become less open to opposing perspectives, polarizing their opinions further.
• 5. Consumer Behavior
• Scenario: A customer believes that a particular brand is superior.
• Outcome: They seek positive reviews about the brand and ignore critical feedback, potentially leading to an
unsatisfactory purchase.
Overconfidence Bias in Decision
Making
• Overconfidence bias is the tendency to overestimate one's abilities,
knowledge, or the accuracy of one’s judgments and decisions. This cognitive
bias often leads to an inflated sense of certainty and an underestimation of
risks or challenges, which can result in suboptimal outcomes.
• How Overconfidence Bias Manifests
1.Overprecision: Excessive confidence in the accuracy of one’s knowledge or
judgments.
2.Overestimation: Overrating one’s own abilities, control, or influence over
outcomes.
3.Overplacement: Believing one’s performance or capabilities are better than
those of others.
• Examples of Overconfidence Bias in Decision Making
• 1. Business Strategy
• Scenario: A CEO launches an ambitious project, convinced it will succeed despite limited market research.
• Outcome: The company faces financial losses because the CEO underestimated competition and
challenges.
• 2. Stock Market Investments
• Scenario: An investor believes they can outperform the market due to their understanding of trends.
• Outcome: They take on excessive risks, leading to significant financial losses during market downturns.
• 3. Academic or Professional Goals
• Scenario: A student skips studying, assuming their knowledge is sufficient to ace an exam.
• Outcome: They perform poorly, misjudging the difficulty of the questions.
• 4. Engineering and Construction Projects
• Scenario: Engineers underestimate the time and cost required for a major infrastructure project.
• Outcome: The project suffers delays and cost overruns, as unforeseen complications arise.
• 5. Personal Relationships
• Scenario: A person believes they understand their partner so well that communication isn’t necessary.
• Outcome: Misunderstandings arise, straining the relationship.