Judgment in Managerial Decision
Making 8e
Chapter 4
Bounded Awareness
Copyright 2013 John Wiley & Sons
Problem 1: Role-Playing Exercise
Six people are randomly assigned to the roles A, B, C, D, E,
and F. A is randomly selected and given $60 to allot
among A, B, C, D, E, and F. The amounts given to B, C, D,
E, and F must be equal, but this amount may be different
from the amount that A allocates to A (herself/himself).
B, C, D, E, and F will be asked to specify the minimum
amount that they would accept. If the amount offered by
A to each of B, C, D, E, and F is equal to or greater than
the largest amount speciﬁed by B, C, D, E, or F, the $60
will be divided as speciﬁed by A. If, however, any of the
amounts speciﬁed by B, C, D, E, and F are larger than the
amount offered by A, all six parties will receive $0.
Problem 2: Pick a Winner
You are given a choice of boxes X, Y, or Z. One of these three boxes has
a valuable prize in it. The other two boxes are empty. After you pick
one of the boxes, the computer will open one of the other two boxes,
show you that this unchosen box does not have the prize, and offer
you to trade your chosen box for the unopened, unchosen box. For
example, if you were to choose box X, the computer would open one
of the two other boxes (e.g., Y) and show you that it is empty. The
computer would then offer you the opportunity to switch your choice
from X to Z.
A student who participated in the study picked box Y. The computer
then opened box Z, showed the student it was empty, and offered the
student to trade box Y (which the student originally chose) for box X
(the remaining unopened, unchosen box).
Problem 3: Acquiring a Company
• You are Company A
• You want to acquire Company T
– Company T is undertaking a project
– Project outcome range: $0 to $100
– All outcomes equally likely
– Company T worth 50% more if acquired
• Offer must be made early
• Company T will decide after outcome is known
Problem 4: Role Playing Exercise
Six people are randomly assigned to the roles A, B, C, D, E,
and F. A will be randomly selected and given $60 to allot
among A, B, C, D, E, and F. The amounts given to B, C, D,
E, and F must be equal, but this amount may be different
from the amount that A allocates to A (herself/himself).
B, C, D, E, and F will be asked to specify the minimum
amount that they would accept. If the amount offered by
A to each of B, C, D, E, and F is equal to or greater than
the smallest amount speciﬁed by B, C, D, E, or F, the $60
will be divided as speciﬁed by A. If, however, all of the
amounts speciﬁed by B, C, D, E, and F are larger than the
amount offered by A, all six parties will receive $0.
Problem 5: Pick a Winner
You are given a choice of boxes X, Y, or Z. One of these three boxes has
a valuable prize in it. The other two boxes are empty. After you pick
one of the boxes, the computer may open one of the other two boxes,
show you that this unchosen box does not have the prize, and offer
you to trade your chosen box for the unopened unchosen box. The
computer will make its decision whether to open a box and offer you a
switch with the goal of minimizing the likelihood that you get the prize.
For example, if you were to choose box X, the computer might decide
to open one of the two other boxes (e.g. Y), show you it’s empty, and
offer you the opportunity to switch your choice from X to Z.
A student who participated in the study picked box Y. The computer
then opened box Z, showed the student it was empty, and offered the
student to trade box Y (which the student originally chose) for box X
(the remaining unopened, unchosen box).
Problem 6: Connect the Dots
• Without lifting your pencil (or pen) from a
piece of paper, draw four (and only four)
straight lines that connect all nine dots shown
here:
• Ponzi scheme cracks in 2008—Bernie Madoff
• Why did nobody notice earlier?
• Bounded awareness
Problem 4: Connect the Dots
What Most People Do
The Correct Solution
Forms of Bounded Awareness
• Inattentional blindness to obvious information.
• The failure to notice obvious changes in one’s
environment.
• The tendency to focus on only a part of the
problem at hand.
• Bounded awareness in groups.
• Bounded awareness in strategic decisions.
• Bounded awareness in auctions.
Inattentional Blindness
http://www.youtube.com/watch?v=Ahg6qcgoay
4
• Did you notice anything unusual in the video?
• Other examples of inattentional blindness.
Change Blindness
http://www.youtube.com/watch?v=vBPG_OBgT
Wg
• Change blindness
• Other examples of change blindness:
– Auditors of companies
– Unethical behavior
Focalism and the Focusing Illusion
• Focalism
• Overestimation of our emotional reactions
– Affective forecasting errors
– Overweighting salient information
• Focusing on specific events
Bounded Awareness in Groups
•
•
•
•
Much decision-making occurs in groups.
Mentioned information is considered.
Groups focus on shared information.
Groups should emphasize unique information.
Bounded Awareness in Strategic
Settings
• Bounded awareness of rules
• Bounded awareness of others’ decisions
Multiparty Ultimatum Games
• Consider Problems 1 and 4
– Problem 1: Largest acceptance price
– Problem 4: Smallest acceptance price
• Problem 1
– Will all players ask for less than $10?
– Maximizing strategy: 10-10-10-10-10-10
• Problem 2
– Will at least one player ask for $1?
– Maximizing strategy: 55-1-1-1-1-1
What Do People Actually Do?
Multiparty Ultimatum Game
Mean Offers to Each Player (in
Dollars)
9
8
7
6
5
4
3
2
1
0
Largest Minimum Offer (Problem 1) Smallest Minimum Offer (Problem 4)
The Monty Hall Game
• Consider Problems 2 and 5
– Problem 2: Box without prize opens
– Problem 5: Box without prize opens if it minizes
chance of winning
• Problem 2
– Unopened box: 2/3 chance of winning
– People should always switch
• Problem 5
– Opened box: 100% chance of winning
– People should never switch
What Do People Actually Do?
Percent of Participants Making
Correct Decision
Monty Hall Game
90
80
70
60
50
40
30
20
10
0
Problem 2 (Door Opens with
Certainty)
Problem 5 (Door Opens if it
Maximizes Chances of Losing)
Problem 3: Acquiring a Company
• If Company A offers $50:
– Offer not accepted if T > $50
– In accepted offers, average T value: $25
– Value to Company A: $37.50
– Company A loss: $12.50
• A loses on any offer > $0
• Company A shouldn’t offer anything
What Do People Actually Do?
More Bounded Awareness
•
•
•
•
•
Auctions
Logic versus actual decisions
Reference group neglect
Focus on outcomes
Choice overload in others