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

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• Values, Choices and FramesSession 10Decision Making and Risk Sp2006

• Role of Memory and Processing Biases in Decision Making

• 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.

• New Product Development SituationThe 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?

• Part-List Cueing EffectTime 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 GroupFor items not studied at time 3Re-Study Group < No Study Group

• Part-List CueingIf there are n options in an option space, S.Let rn be the number of options recalled from memory; rn n.If a few options, say, c, are provided as a memory cue, then, rc, the number of items recalled from S when c items are provided, will be such that:rc
• How Structure Affects Importance of Decision CriteriaSource: Schumann and Scott (1987)

• 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 generationFor importance assessment

• Elementary Information Processing ModelInputCognitive and Emotional ProcessesOutput

• 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.

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

• Memory Biases in Information ProcessingInputCognitive and Emotional ProcessesOutputVividnessSelf-relevancePrimacy-RecencyMood Congruent Recall

• Simulating Competitor BehaviorCompany 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?

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

• Dizziness and Brain TumorWhich 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 RightLower Right

According to the data in the table, is dizziness associated with brain tumors?YesNoNot sure

Brain Tumor

Dizziness

Present

Absent

Present

160

40

Absent

40

10

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

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

• 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?

• Decision before DecisionOne group gets to choose between:Tire A:55,000 and \$85Tire B:75,000 and \$91

Another group gets to choose between:Tire A:30,000 and \$25Tire B:35,000 and \$49

Now both groups choose between:Tire A:40,000 and \$60Tire B:50,000 and \$75

• Background Tradeoff Contrast EffectPre-decision choice:Big versus small bang for the buckVery 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.

• Local Contrast EffectSuppose people are trying to choose between:Tire A:40,000 and \$60Tire 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.

• Review Session 10 (April 4)Structuring the DecisionMemory BiasesPart List Cuing How available stimuli limit what is retrieved from memory.Unstructured privateUnstructured publicStructured public/privateInflation of ImportanceContext of discovery/confirmationPrimacy and RecencyVividnessSelf-relevanceMood-congruent recallProcessing BiasesSelf-other discrepancy in risk estimates, ability to visualize risk increasing and decreasing factors, ability to use themIllusory correlation.

Value and ChoicesValue MaximizationIndependence of Irrelevant AlternativesTradeoff ContrastsBackground ContrastLocal Contrast