Question

Define System 1 and System 2 thinking. Explain how they are relevant to decision-making.

Describe the three forms of overconfidence, and give examples of how overconfidence has caused some bad historic decisions.

Explain rational decision-making, and briefly discuss the six steps needed to achieve rational decision-making

Answer 1

"System 1" thinking is seen as fast, natural and sensitive; on the other hand, "System 2" thinking is seen as time-consuming, more considered, and more logical. In the decision making, thee two types of thinking indicate the basis on which the decision I made The system 1 thinking gives an impression of an irrational decision while system 2 thinking facilitates a more rational decision making.

Three types of overconfidence are as below=

Overestimation= This can be seen as when a person rates his or her ability, knowledge or performance quite higher than it actually is

Overplacement= This is the belief that he or she is better than others

Overprecision = This represents the overconfidence while forecasting the future events

Example- Before the beginning of WWII, Adolf Hitler had the overconfidence that the German Army is unbeatable and the German race is the purest race. This led him to attack many countries and it resulted in his fall and causing millions of deaths in the form of WWII

Rational decision making can be defined as a decision-making exercise that considers a number of factors before taking a well-informed decision, It follows a certain process of steps before coming to a conclusion.

The step of rational decision making=

1. Define the problem= the decision-maker defines the problem in hand in order to have a better understanding of it
2. Identify the decision criteria= Different parameters on which the decision has to be made are decided.
3. Allocate weights to the criteria- Depending on the importance or significance of various decision factors, a weight is assigned to different possible decision-making criteria
4. Develop the alternatives.= the decision-maker looks for the various alternative that can help him to resolve the given issue
5. Evaluate the alternatives.= All the alternatives are compared with each other to find their relative significance
6. Select the best alternative= On the basis of the above evaluation, the alternative facilitating bet outcome will be selected