Ch 11.4 Flashcards
What happens in perfect rationality?
A rational decision maker can objectively evaluate the effectiveness of their decision.
What happens in bounded rationality?
People may avoid testing the effectiveness of their decision due to overconfidence, leading to justification of faulty decisions.
What is escalation of commitment?
This occurs when decision makers continue investing in a failing decision due to sunk costs (resources that cannot be recovered).
What causes escalation?
Sunk costs: Belief that additional resources might recover losses.
Social norms: Pressure to appear consistent or avoid appearing weak.
Framing: Viewing a decision as a choice between a certain loss (sunk costs) and an uncertain loss (more investment).
Personality factors: Some individuals, like those high in neuroticism, are less likely to escalate.
How to prevent escalation?
Monitor optimism: Be wary of excessive early positive feedback.
Reframe the problem: Shift focus to saving resources rather than spending more.
Set specific goals: Prevent further investment if goals aren’t met.
Accountability: Emphasize how decisions are made, not just the outcomes.
Separate decision-making: Different individuals should assess if a course of action should continue.
What is hindsight bias?
The tendency to think we “knew it all along” after the outcome is known, which can distort the decision-making process.
What are the dangers of hindsight bias?
Knew-it-all-along effect: Misremembering or adjusting probabilities to match the outcome.
Blaming external factors: Taking credit for success but blaming external factors for failure.
