15.301/310, Managerial Psychology Prof. Dan Ariely Lecture 6: Decision Making (a dash “-“ indicates student responses) Feedback on 4 page proposal From here, there are not many opportunities to deviate Now is the time to get serious about your research projects From now on, when you submit a paper, also submit the previous version of the paper project After you start data collection, there is less and less opportunity to change This is a crucial time of the semester COUHES website self tutorial - you have to take it before Wednesday (Human rights w/ subject - what can and cannot do) The topic today is decision making When we talked about Perception we looked at visual illusions One perspective on decision making that says the way we make decisions is similar to the way we look at visual illusions What are visual illusions? What are some of the aspects we found apparent? -something not there -suggestion for blank space like the grid What in the visual illusions we talked about give us hints about the way we make decisions? Remember the Stroup test? -words of colors, printed in other colors This showed that there are some things we do so well that it is really hard for us to do otherwise Some people suggest that a good way to think about decision making is to make an analysis of visual illusions. Some things we naturally do well or don’t do well, some things we learn, we over-learn, we keep on doing them. Today we’ll talk about a few of those. We will basically cover 5 topics in decision making. We will learn something about all 5, but it of course goes beyond the specific examples (slide) What is decision making? There is a perspective in psychology that says everything people do in terms of changes (how people change over time) is a decision. Not that every word I utter I think about, but the perspective is that you would think of everything as a decision.It is important that sometimes a decision is deliberate and we think very carefully about it. Should I study for the exam? Or should I maybe go see the last game of the Red Sox? Sometimes the deliberation is after the fact. If we think about the decision to come to MIT, many people had a very simple decision – well, my parents told me I need to go there so I went But Later on they reason about it, after the fact Decision Making as a discipline is on the opposite side as economics, it is the evil twin of economics. While economics is thinking about rational human beings, Decision Making looks at how people are not necessarily rational when they make a decision and looks at how people behave under those circumstances. (comic slide) Cartoon, king says to the guy in the pit, prove your guilt or innocence by the door you pick. One door has a dragon, the other has a beautiful maiden. Which door do you pick? The guy says - the one with the gorgeous maiden. This cartoon is to illustrate that the decisions that are most apparent to us are the difficult decisions: where to go to graduate school, what job should we take, who to marry, should we ask for a raise, should we quit our job? But in fact we make a million decisions a day that are easy, like the one about the door, or not to cross the street on a red light, or we decide not to kick the people who are standing in front of us in line. We do all kinds of things all the time that involve decisions, but we make them very fast and not interactive. The decisions we will talk about here are not these decisions we make all the time, but the hard decisions, those that are more difficult. We make a million decisions a day, most are very easy Most are fast, accurate Say we design a human being If we think about how we want a human to behave, it would be the rational view. Instead, the perspective of Decision Making and psychology is how people actually behave and why they behave that way Conflict – economics and psychology comes to play Assumptions for Rational agents (slide) People know what they know I know I like Mac more than PC Like cheese more than broccoli I know these things And we are in control, we can control ourselves, self control We are selfish, we maximize our own utility We are calculated 15.301/310, Managerial Psychology Lecture 6 Prof. Dan Ariely Page 2 of 11-5 In contrast, the perspective we will talk about today is that people are not as calculated and selfish. People are compulsive and myopic, we will talk about hyperbolic discounting when reciprocating, when someone is vindictive “Boundedly rational” (slide) From Ernst Berndt’s research: I give you $10, you can give to Leonard as much as you want, he can accept or reject. If he accepts, both of you get your share. If he rejects, you both get nothing. How much do you give Leonard? Why 5? -So he will accept So, if you were a rational economist, you would say, Leonard would be happier with a dollar than with nothing. So if I offer him a dollar he will be happier with than without, so he will accept. But this is a more vindictive style. You are saying, if I give him 3 even, he would lose $3 just to punish you by more, so therefore you have to be nice to him. Topics today (slide) Anybody here ever experience regret? Anybody not? Nobody is raising their hand in either choice. Try again. Examples, what is regret? -not sleep enough last night -take more than 4 yrs to graduate -going to MIT in first place What causes you to regret something? -possibility of a better outcome If MIT only school in world, still regret coming? -probably Why? Only regret if compare, consider other alternatives. Who will regret more: miss plane by 2 min, or miss by 2hr and 2 min? -2 min Very strong feeling that person A would regret more, why is that? -closer to target To what? -could have made it Can easily imagine that person A could have made it. Like we said before, regret is not about current state, about what we can easily imagine are alternate states Happiness not determined by what have, but by what we don’t have. How easy it is to imagine what we don’t have. 15.301/310, Managerial Psychology Lecture 6 Prof. Dan Ariely Page 3 of 11If we just look at other possible states, how many possible states are there? -infinite Infinite number of possible states. How do we do that? Compare ourselves to infinite number of possible states? When we think about coming to MIT, What are we comparing self to? Shoot, I came to MIT, I could have won the lottery! Lots of