MGMT 371 Lecture 1Outline of Last Lecture I. Syllabus DayOutline of Current Lecture II. Classical- Rational ModelIII. Bounded RationalityIV. Bias Factors in DecisionsCurrent LectureClassical-Rational model- How a decision maker should make decisions (normative)- Considers all alternatives and the potential results of each- Logically calculates the economic return of each alternative- Selects the alternative with the maximum economic return (maximizes)Bounded rationality- People have limited time and cognitive ability to process information for decision making- As a result people are “cognitively lazy”EX: BAT AND A BALL PROBLEM- A bat and a ball together costs a total of $1.10- The bat costs $1.00 more than the ball- How much does the ball cost?- Ball= 10 cents, bat= $1.10…. total: $1.20- Ball= 5 cents, bat= $1.05.. total $1.10- Assumption of first price is example of being cognativly lazy- Another result is they download and act based on simple “sticky” models of reality- Use cognitive shortcuts and heuristics “rules of thumb” to make decisionso Ex: don’t play card with people in glasses or eat at “mom” restaurantsHerbert A. Simon- ADMISITRATIVE MODEL:- How a decision maker actually makes decisions (descriptive)These notes represent a detailed interpretation of the professor’s lecture. GradeBuddy is best used as a supplement to your own notes, not as a substitute.- Decision makers tend to consider limited alternatives- Uses simplified decisions rules (rules of thumb- heuristics)- Selects the first alternative that satisfies minimum decision criteria (satisfices).Bias Factors in Decisions- Persons fail to sufficiently adjust from initial positions (anchoring or first impressions)o Example: save $25 on $100 purchase people walk to better dealo Save $25 on $1500 people don’t walk two blockso Because you are anchored on the initial price- People favor information that confirms their beliefs or expectations (confirmation bias)- An event is believed to be more likely when someone can recall an example of it (availability bias) ex. Terrorism insurance vs. luggage insurance- Persons make riskier decisions in situations that are framed as a loss vs. a gain (framing)o If you frame a situation as a loss, people fear it, and are more likely to take riskier stepso People think in terms of losses vs. gains .. if you say 400 will die vs. 200 will be saved they will choose 400 will die because it is framed as a huge loss- Managers continue to invest resources in failing projects to justify their past decisions (escalationof