1. Decision Making How do people make decisions? Are there differences between making simple decisions vs. complex ones?

2. Classical Decision Theory • Based on the idea of the rational actor or economic man • People are always fully informed about all of their options. • They are always fully informed about the consequences of each of those options. • They are fully sensitive to every distinction between their options • They always make completely rational decisions.

3. Problems with Economic Man • Do people really have the resources to be this thorough? • Are people really that rational about even many of their decisions, much less all of them? • Do we only take into account the raw economic impacts of our decisions?

4. Subjective Expected Utility Theory • Still assumes that people are largely rational in their decision making. • However, it takes into account people’s evaluations of the “pleasure” (positive utility) or “pain” (negative utility) a given decision will engender. • Decisions are still rational, but are based on our subjective judgments of the utility (+ and -) of a decision.

5. Problems with SEUT • Allows for choices based on people’s preferences. • Still requires a high degree of rationality on the part of the decision maker. • Still requires a high degree of thoroughness in evaluating options.

6. Satisficing • Simon (1957) claimed what might seem obvious - people (and industries) do not have the time, energy, and resources to consider all possible options. • Simon theorized that people have bounded rationality. We evaluate our options until we find something that is “good enough.”

7. What do we mean by “good enough”? • Evaluating a decision involves attempting to evaluating a number of different variables. • When we start out, we want to make a decision that maximizes the value of all of the variables. • Eventually, the cost of continuing to spend time and resources searching begins to outweigh the expected benefits of maximizing all the variables.

8. Elimination by aspects • Following up on satisficing, Tversky theorized that we use a decision making process where we choose one aspect (variable) and eliminate all options that don’t meet a minimum criterion. • Then we pick another aspect….. • Etc.

9. Influences on our evaluations • Availability heuristic: We judge the likelihood of an event or outcome based on how readily we can think of similar examples. • Representativeness: We judge the likelihood of an outcome based on how much we believe the outcome represents underlying truths about the world. • Ex: Gambler’s fallacy; regression fallacy; conjunction fallacy