Decision Making

Choosing Under Constraint

Management's core act is choosing. The theory of how comes in three models, arranged by how much of the ideal survives contact with reality.

Bounded rationality means real decision-makers build simplified models and satisfice: search until the first alternative that is good enough, then stop.

Common pitfall: Treating satisficing as a character flaw. When search is costly, stopping early is actually the optimal economic strategy.

Biases & Risk Arithmetic

Systematic biases distort every model of choice:

• Anchoring: The first number pulls the estimate.
• Confirmation: Hunting evidence for prior beliefs.
• Sunk cost: Investing because past spent capital.
• Overconfidence: The planning fallacy's engine.
• Availability: Judging frequency by memorability.
• Escalation: Sunk cost with a public audience.

Under risk, choices use expected value: each outcome weighted by its probability.

$$EV = \sum p_i \cdot v_i$$

A 60% chance of 50 and 40% chance of -20 yields: $0.6(50) - 0.4(20) = 22$.

Pitfall: Sunk costs must never touch the EV calculation. Only future consequences count.