Chapter 2 How People make Decisions Involving Multiple Objectives

1. Chapter 2 How People make Decisions Involving Multiple Objectives

2. Examples of decisions involving multiple objectives • Choosing a holiday • liveliest nightlife • least crowded beaches • most sunshine • most modern hotels • lowest cost • Choosing a company to supply goods • best after-sales service • fastest delivery time • lowest prices • best reputation for reliability

3. Bounded rationality • The limitations of the human mind mean that people use ‘approximate methods’ to deal with most decision problems • As a result they seek to identify satisfactory, rather than optimal, courses of action • These approximate methods, or rules of thumb, are often referred to as‘heuristics’

4. Heuristics • These heuristics are often well adapted to the structure of people’s knowledge of the environment • Quick ways of making decisions, which people use, especially when time is limited, have been referred to as ‘fast and frugal heuristics’

5. Compensatory vs. non- compensatory strategies • Compensatory strategy - poor performance on some attributes is compensated by good performance on others - Not the case in a non-compensatory strategy • Compensatory strategies involve more cognitive effort

6. The recognition heuristic • Used where people have to choose between two options • If one is recognized and the other is not, the recognized option is chosen • Works well in environments where quality is associated with ease of recognition

7. It may be that a more easily recognized manufacturer is likely to have been trading for longer and be larger. Its long-term survival and size may be evidence of its ability to produce quality products and to maintain its reputation.

8. The minimalist strategy • First apply recognition heuristic • If neither option is recognized, simply guess which is the best option • If both options are recognized, pick at random one of the attributes of the two options and choose best performer on this attribute • If both perform equally well on this attribute, pick a 2nd attribute at random, and so on

9. Take the last • Same as minimalist heuristic except that people use the attribute that enabled them to choose last time when they had a similar choice • If both options are equally good on this attribute, choose the attribute that worked the time before, and so on • If none of the previously used attributes works, a random attribute will be tried

10. The lexicographic strategy • Used where attributes can be ranked in order of importance • Involves identifying most important attribute and selecting the option which is best on that attribute (e.g. choose cheapest option) • In there’s a ‘tie’ on the most important attribute, choose the option which performs best on the 2nd most important attribute, and so on

11. This ordering of preferences is analogous to the way in which words are ordered in a dictionary • the lexicographic strategy involves little information processing (i.e. it is cognitively simple) if there are few ties.

12. However, when more information is available, the decision will be based on only a small part of the available data. In addition, the strategy is non-compensatory.

13. The semi-lexicographic strategy • Like the lexicographic strategy - except if options have similar performance on an attribute they are considered to be tiedand moves on to the next attribute • It can lead to violation oftransitivity axiom…

14. Example… • ‘If the price difference between brands is less than 50 cents choose the higher quality product, otherwise choose the cheaper brand.’ Brand Price Quality A $3.00 Low B $3.60 High C $3.40 Medium

15. Elimination by aspects (EBA) • Most important attribute is identified and a performance cut-off point is established • Any alternative falling below this point is eliminated • The process continues with 2nd most important attribute, and so on

16. Strengths & limitations of EBA • Easy to apply • Involves no complicated computations • Easy to explain and justify to others • Fails to ensure that the alternatives retained are superior to those which are eliminated - this arises because the strategy is non-compensatory.

17. In the example, one of the cars might have been rejected because it was slightly below the 1600cc cut­off value. Yet its price, service history and mileage were all preferable to the car you purchased. These strengths would have more than compensated for this one weakness. • The decision maker's focus is thus on a single attribute at a time rather than possible trade-offs between attributes.

18. Sequential decision making: Satisficing • Used where alternatives become availablesequentially • Search process stops when an alternative is found which is satisfactory in that its attributes’ performances all exceed aspiration levels • These aspiration levels themselves adjust gradually in the light of alternatives already examined

19. Decision makers use an approach calledsatisficing. • The key aspect of satisficing is theaspiration levelof the decision maker which characterizes whether a choice alternative is acceptable or not .

20. In a satisficing model, search terminates when the best offer exceeds an aspiration level that itself adjusts gradually to the value of the offers so far received ...

21. Note that satisficing is yet another example of a non-compensatory strategy. • The final choice depends on the order on which the alternatives present themselves.

22. Reason-based choice • Shafir et al.: ‘when faced with the need to choose, decision makers often seek and construct reasons in order to resolve the conflict and justify their choice to themselves and to others’.

23. Some consequences of reason-based choice • it can make the decision maker highly sensitive to the way a decision is framed. • Decisions framed as ‘choose which to select…’ can lead to different choices to those framed as ‘choose which to reject’ • Options can be rejected if they have weakly favorable or irrelevant attributes

24. Positive features are weighted more highly when selecting and negative features more highly when rejecting. This violates a basic principle of rational deci­sion making that choice should be invariant to the way the decision is framed.

25. Example of reason-based choice Candidate ACandidate B Average written communication skillsExcellent written communication skills Satisfactory absenteeism recordVery goodabsenteeism record Average computer skills Excellent computer skills Reasonable interpersonal skills Awkward when dealingwith others Average level of numeracy Poor level of numeracy Average telephone skills Poor telephone skills

26. Factors that affect how people make choices • Time available to make decision • Effort that a given strategy will involve • Decision maker’s knowledge about the environment • Importance of making an accurate decision • Whether or not the choice has to be justified to others • Desire to minimize conflict (e.g. conflicts between the pros and cons of the alternatives)