# Decision Making

Business I · Business Administration · https://tryals.app/learn/business-i/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.

| Model | Assumes | Decision rule |
| --- | --- | --- |
| **Rational** | Complete info, unlimited time | Maximize |
| **Bounded (Simon)** | Limited info, attention, time | Satisfice (good-enough) |
| **Intuitive** | Experience, pattern matching | Holistic pattern recognition |

**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.

## Practice questions

7 of this lesson's 13 practice questions, with answers. The full set is in the app.

### 1. A hiring manager interviews candidates until one clears the bar of "clearly capable," then stops searching. Simon would say she is…

A. Satisficing, since search itself costs
B. Anchoring on the first candidate
C. Violating every principle of good decision making
D. Maximizing expected value

**Answer:** A. Satisficing, since search itself costs

**Why:** Satisficing is bounded rationality’s signature move. With costly search and an open position bleeding productivity, "first candidate above the bar" can dominate an exhaustive tournament, the rational model quietly assumes search is free.

Page: https://tryals.app/practice/business-i/decision-making/a-hiring-manager-interviews-candidates-until-one-clears-the-bar-of

### 2. When is intuition a _reliable_ decision input?

A. The domain is stable, with recurring patterns
B. The decider has long experience in the domain
C. Past decisions produced fast, clear feedback
D. The situation is novel and unlike anything seen before

**Answer:** A. The domain is stable, with recurring patterns; B. The decider has long experience in the domain; C. Past decisions produced fast, clear feedback

**Why:** Kahneman and Klein’s truce: intuition = recognition, so it needs patterns to have been learnable, experience, regularity, feedback. In genuinely novel situations there is nothing to recognize, only confidence to misplace.

Page: https://tryals.app/practice/business-i/decision-making/when-is-intuition-a-reliable-decision-input

### 3. Simon called stopping at the first acceptable option *satisficing* and treated it as intelligent rather than lazy. What makes it intelligent?

A. Because acceptable outcomes are all that organisations are legally required to achieve
B. Because the first acceptable option is usually also the best one
C. Because managers lack the training to evaluate all alternatives properly
D. Search is costly, so the optimal amount of searching is finite

**Answer:** D. Search is costly, so the optimal amount of searching is finite

**Why:** Evaluating every alternative has a price in time and forgone opportunity, so exhaustive search is itself irrational past some point, bounded rationality is a claim about limits, not about laziness. Naming it earned Simon the 1978 Nobel and reframed decision theory around what deciding costs.

Page: https://tryals.app/practice/business-i/decision-making/simon-called-stopping-at-the-first-acceptable-option-satisficing-and

### 4. In the rational model, a decision should account for money already spent so that past investment is not wasted.

**Answer:** False

**Why:** False. Money already spent is unrecoverable whatever you now choose, so it should not enter the comparison at all, only future costs and benefits differ between the options. Letting it in is the sunk-cost fallacy, and 'we have already put in three years' is its usual form.

Page: https://tryals.app/practice/business-i/decision-making/in-the-rational-model-a-decision-should-account-for-money-already

### 5. Order the steps of the rational decision model.

**Answer:**

1. Identify and define the problem
2. Set and weight the decision criteria
3. Generate and evaluate alternatives
4. Choose the best-scoring alternative
5. Implement and evaluate the result

**Why:** Problem, criteria, alternatives, choice, implementation. Setting criteria *before* seeing options is the step real committees skip, and the moment the favorite option starts writing its own scorecard.

Page: https://tryals.app/practice/business-i/decision-making/order-the-steps-of-the-rational-decision-model

### 6. Option A pays 100 with probability 0.5, else 0. Option B pays 40 for sure. Compute the difference $EV_A - EV_B$.

**Answer:** 10 (within ±0.5)

**Why:** $EV_A = 50$, $EV_B = 40$: the gamble is worth 10 more *on average*. Whether a real manager should take it depends on risk tolerance and repetition. EV is the start of the argument, not the end.

Page: https://tryals.app/practice/business-i/decision-making/option-a-pays-100-with-probability-0-5-else-0-option-b-pays-40-for

### 7. Match each decision model to its signature.

**Answer:**

- Rational model → Maximize: evaluate every alternative against every criterion
- Bounded rationality → Satisfice: stop at the first good-enough option
- Intuition → Pattern recognition compiled from experience
- Escalation of commitment → Doubling down publicly on a failing course

**Why:** Three ways to choose and one way to keep choosing wrong. Simon’s satisficing is the realistic middle, not a defect.

Page: https://tryals.app/practice/business-i/decision-making/match-each-decision-model-to-its-signature