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Business System Analysis & Decision Making - Lecture 13

Business System Analysis & Decision Making - Lecture 13. Zhangxi Lin ISQS 5340 July 2006. Chapter 11: Bounded Awareness. Outline of the chapter Inattentional Blindness Change Blindness Focalism and the Focusing Illusion Bounded Awareness in Groups Bounded Awareness in Negotiations

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Business System Analysis & Decision Making - Lecture 13

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  1. Business System Analysis & Decision Making- Lecture 13 Zhangxi Lin ISQS 5340 July 2006

  2. Chapter 11: Bounded Awareness • Outline of the chapter • Inattentional Blindness • Change Blindness • Focalism and the Focusing Illusion • Bounded Awareness in Groups • Bounded Awareness in Negotiations • Bounded Awareness in Auctions • Discussion

  3. Six Problems • Problem 1. Allocating $60 among 6 people by one of them. (Condition: $ offered by A >= Max $ specified by others) • Problem 2. Choosing a nonempty box between two boxes of the three while the third one is known empty. • Problem 3. Offering the price for acquiring a company with uncertain performance. • Problem 4. A revision of Problem 1. (Condition: $ offered by A >= Min $ specified by others) • Problem 5. A revision of Problem 2. • Problem 6. Drawing 4 straight lines to connect 9 dots.

  4. Inattentional Blindness and Change Blindness • Inattentional Blindness • People tend not to see some subtle objects that they are looking at • Change Blindness • Gradually moving toward unethicality - “Slippery slope”, “boiling frog syndrome” • Poor change detection – people fail to notice changes in the information that is visually available

  5. Focalism and the Focusing Illusion • Focalism: The common tendency to focus too much on a particular event and too little on other events that are likely to occur concurrently. • Focusing Illusion: The tendency of people to make judgments based on their attention to only a subset of available information, to overweight that information, and to underweight unattended information. • The experiment conducted by Fox and Tversky (1998) • The more the number of divisions, the more the summation of the probabilities exceeds 100% • The Challenger space shuttle disaster • Oversight the connection between the low temperature and O-ring – 99% chance of malfunction.

  6. Bounded Awareness in Groups • Groups collectively possess more information than individual members. Sharing unique information is a critical source of group potential. • A consistent tendency that groups focus more on shared information than on unique or unshared information.

  7. Bounded Awareness in Negotiations • Multiparty Ultimatum Games • Problem 1 & 4 • The Monty Hall Game • Problem 2 & 5 • Acquiring a company • Problem 3 • The expected value is $x * 150% / 2 = $x * 75%. When you pay $x, you lose 25% • The target will accept the acquirer’s offer when the firm is least valuable to the acquirer – It’s a lemon. • However, the experiment with 123 MBA students showed that dominant response fell between $50-$75: “On average, the firm will be worth $50 to the target and $75 to the acquirer; … be profitable to both parties” – Wrong answer.

  8. Discussion: Job Offering • A company has a job opening for MBA students. There are two types of MBA students: qualified (50%) and less qualified (50%). The market salary for the qualified candidates is $60,000/year and for the less qualified candidates is $40,000/year. Students know if they are qualified or not but the company doesn’t. What should the salary level be listed with the job? • A. $40,000 (low), B. $50,000 (average), C. $60,000 (high) • If you were interviewed, what is your decision with regard to the above salary levels if you are qualified or less qualified only known by yourself? • This is referred to as information asymmetry (Aklorf 1970)

  9. Bounded Awareness in Negotiations • Affect our assessment of competitors - insensitive to the quality of their competition. Easy problems are easy to all parties, and hard problems are hard to them as well. • “System neglect” – human tendency to undervalue the importance of the general context in which they are making their decision. • Neglect of the impact of decisions on others outside the negotiation. • Prisoner’s dilemma game

  10. Bounded Awareness in Auctions • “Winner’s curse” • In a two-party negotiation, the winner’s curse usually occurs when the buyer fails to consider the perspective of the seller. • In auctions, the winner’s curse typically results from the winning bidder’s failure to consider the implications of bidding higher that his or her competitors – all of them are at the same information disadvantage relative to the seller. • The winning bidder may have significantly overestimated the actual value of the commodity.

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