Risk Preferences and the Role of Intuition Under Uncertainty

Description

Managers typically make their decisions under many constraints (time, resources, skills, emotions, and ability to process vast information) that limit their "rationality." Therefore, they frequently rely on intuition when making decisions. This note describes some of the common mistakes of intuitive decision making. Learning about mistakes does not eliminate them but it does allow us to recognize situations in which a particular error is likely to be made. In such situations, intuition cannot be trusted blindly but must be supplemented by logic or analysis. The note provides practical advice and help in this direction. The note also goes into some detail in describing prospect theory (Kahneman and Tversky, 1979), a theory that offers a plausible explanation of the principles behind intuitive judgments. This note is based on the note "Decision Making Under Uncertainty: Risk Preferences and the Role of Intuition", ADN-259-E, by Manel Baucells, Cristina Rata and Franz Heukamp, 2015.

Learning Objective

To learn about some of the most common errors associated with intuitive decision making and how to correct them.

Keywords

Uncertainty