 Mohammad Zainullah

 Born - District Dir (Lower), Aged 45

 Two Children
 Schooling/ University Peshawar
 MSc (PU – 1995)
 MS (Sweden – 2009)

 Job (last 4 years) Marketing, Promoting

 South Wales University, Bradford College UK

 Interests/ Expertise:
 Internationalisation and affordability
Proposed projects:
 HND Civil Engineering (PKR 360 millions)
 UK Bachelor/ Masters
 GoNatural Systems (Teaching)
 Iqra – O Levels

Research: Knowledge Representation, Decision

Making, Opportunity Recognition
 Rationality

 State of being reasonable, based on facts or reason.

 What do you think? We are:

 Rational Bernoulli, Savage, Neumann

 Satisficing and Bounded Rational Simon
 Irrational Kahneman
 Emotional Beings Damasio
 Risk: Undesirable probabilistic outcomes

How you make a Decision?

 You have:

 Alternatives/ Options/ Routes/ Choices

 Anticipated/ perceived/ believed Outcomes
 Some uncontrollable external Events/ states (politics, weather, wars etc)
 Certain, Known probabilities, Unknown probabilities of Outcomes/ States
 Time limitations
 Knowledge (Weigh/ Evaluate/Rank, Cost - benefit analysis)

 You make a choice – You thus decide

Calculate until (1738), Toltay, Toltay + Dundee (1979)
 Daniel Kahneman
Changed the way we think about thinking

 Born: March 5, 1934 (age 81)

 Was awarded the 2002 Nobel Memorial Prize in Economic Sciences
 One of 15 most influential economists
 The world's most influential living psychologist

An Analysis of Decision Under Risk

 Prospect Theory
An Analysis of Decision Under Risk

Humanising Mechanical Economic Decision Theory

Mohammad Zainullah
PhD Scholar
Qurtuba University
March 08, 2015
 How the lecture is being organised:

 Decision Making Definitions

 Utility Definitions
 Review (about 250 years)
 Reaction to Classical Theory
 Criticism EUT

 Nature exposed to questions

 Fourfold Pattern
 Weighting Function
 Value Function
 Prospect Theory
 AQA hypothesis: The inside story

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 Resource Allocation, Decision Making

 “Resource allocation” and “Policy making.”

 “Decision making” Chester Barnard, last century
 “Decision implies the end of deliberation and the beginning of action.” William Starbuck
 Choice about a “course of action” (Simon, 1972)
 Choice leading to “a certain desired objective” – Churchman
 Committing oneself to a course of action (Klein, 2008)

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 Utility

 Determination of the value of an item must not be based on the price, but rather on

the utility (pleasure, pain , wantability, desire ) it yields (Bernoulli, 1738)

 A measure of pleasure and pain (Bentham, 1789)

 Represents wantability (Fisher, 1918)

 Experience utility and decision utility (Kahneman et al., 1997)

 Hedonic experience of an outcome (experienced utility) or preference or desire for

an outcome (decision utility) (Dolan & Kahneman 2008)

 Choices reflect preferences, preferences reflect utility (hedonic experience, pleasure,

pain, wantability)

 To quantify Utility, we use utility function.

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 Rational Choice, Satisficing, Reference dependence, More Humane
(250 years, glimpses)

 Rational Choice Theory: Anticipate outcomes, Rank alternatives using Expected Value/
Utility, Choice of best possible action.
 Complex circumstances, limited time, and inadequate mental computational power reduce
decision makers to a state of “bounded rationality,” argues Simon. Utility - Saticficing
 Daniel Kahneman and Amos Tversky identify factors that cause people to decide against
their economic interest even when they know better.
 Brain-damaged patients, in the absence of emotion it is impossible to make any decisions at
all (Damasio, 1999)
 In people with normal brains, their decisions are "weighted" by emotions and this enables
them to take decisions quickly according to how they feel.
 Thinking is a late evolutionary development, We are still primarily feeling organisms
 RPDM (NDM), people can quickly match the situation to the patterns they have learned and
experienced in the past (Klein, 1989). It was fairly clear how people didn’t make decisions.
 “Humble decision making,” include tentativeness, delaying, and hedging (Etzioni, 1989,
2013)

So: The best, the acceptable, the workable, the humble

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 ‫?‪Where we are heading‬‬

‫‪"Insaan kay jism mai gosht ka aik lothra hay agar wo saheeh hay tu sara jism‬‬
‫‪saheeh hay, agar wo faasid hay tu sara jism faasid hay. Jaan Lo! wo Qalb‬‬
‫“‪hay.‬‬

‫ایک حدیث میں فرمایا گیا ہے ‪ ،‬جسم انسانی میں گوشت کا ایک لوتھڑا ہے‪ ،‬اگر وہ درست‬
‫رہے تو پورا جسم درست رہتا ہے ‪ ،‬لیکن اگر وہ خراب ہو جاتا ہے تو پورا جسم خراب ہو‬
‫جاتا ہے ‪ ،‬لوگو! یادرکھو‪،‬‬
‫گوشت کا یہ لوتھڑا دل ہے۔‬

‫‪13‬‬
  Expected Utility Theory ... An Anecdote!

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 Modern Economic Theory melted away

Gerd Gigerenzer
Berlin 2012
Institute for New
Economic Thinking

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If we go Mathematical Building a case:
If we go Classical Heuristic domination in Decision Making
If we go Modern
Then as-if

Go Intuitively
Use Heuristics
NDM

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 Criticism
Normative, Loss Aversion, Equally Happy, Consistent Preferences, Emotional Neutrality

• Normative theory about how to make optimal decisions under risk. It does
not say anything about how people actually take decisions in practice.

• Can’t explain loss aversion (Rabin, 2000).

• Bernoulli's assumption, if two people have the same wealth, all other things
being equal the people should be equally happy.

• Bernoulli's theory thus lack a reference point.

• Preferences of individuals are consistent among same choices, independent of

how those choices are presented.

• People will be emotionally neutral about their current wealth

• Carriers of utility of outcomes are final states (Reference-Independence)

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 Nature exposed to question
High chance of significant gains, high risk of significant loss

 In the following scenarios, choose A or B.

1. A. 80% chance to win $1000
B. $700 for sure

This choice is framed in terms of high chance of significant gains. Most people
will favor risk aversion. Most choose B. However, the mathematical expected
value of A is $800 (80% x $1000).
An “econ” would choose A.

 2. A. 80% chance to lose $1000 (20% chance of losing nothing)

B. Lose $700 for sure.

This is framed in terms high risk of significant loss. Most would favors risk
seeking and take A. However the expected value of A is to lose $800 ( -$1000 x
80%). B is the better economical choice.
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 Nature exposed to question
Small chance for Significant Gain, Small chance for Significant Loss

 3. A. Bet $10 on a 0.1% chance to win $9,000

B. Do nothing

This scenario is framed in terms of small chance for significant gain. Many will
favor risk seeking and choose A. The economical choice is B.

 4. A. 1% chance to lose $100,000.

B. Pay $1,100 for insurance against a 1% chance to lose
$100,000

This choice is framed in terms of a small chance for significant loss. Most will
favor risk aversion and choose B. By now we can see that the economical
choice is A because its expected value is $1,000. However, most of us would
sleep better with choice B.

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 “Fourfold pattern” for the predictions of Prospect

80% chance to win 80% chance to

$1000 or $700 for lose $1000 or
sure Lose $700 for sure

.1% chance to
win $9,000
or Pay $1,100 for
Do nothing. insurance

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 Probability Weighting

 The following slide represents the relationship between real/ actual/ stated

probabilities and weighted/ perceived probabilities. The “weighted” probability

(wp) is the probability that we tend to actually assign in our thought process, as
opposed to the actual probability, p.

Instead of computing, for each outcome: P ( o )  V (o )

We compute:  ( P(o))  v(V (o))

21 Nothing can better explain but Ilm Ul Yaqeen, Ain Ul Yaqeen, Haq Ul Yaqeen
 Investment in film
PK, risk of losing
part of 80 crore .
Very low
probabilities over-
weighted
Earned 650 crore

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 Decision processes in two stages

 Editing and Evaluation.

 Editing: Coding, Combination, Segregation, Cancellation, Simplification

 During editing, outcomes of the decision are ordered following certain heuristic.

Set a reference point and then consider lesser outcomes as losses and greater ones
as gains.

 Evaluation phase, people behave as if they would compute Net Subjective Value

based on the potential outcomes and their respective probabilities, and then choose
the alternative having a higher NSV.

Value of an item, must not be based on the

People choose actions on the basis price, but rather on the utility (pleasure,
of pleasure and avoid pain, pain , wantability, desire ) it yields
Jeremy Bentham (1748-1833)
25 (Bernoulli, 1738)
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 Prospect Theory
Probabilistic alternatives, differential perception, more heuristics

 Prospect Theory is a behavioral economic theory that describes the way people

choose between alternatives, where the probabilities of outcomes are known. The
theory states that people make decisions (editing and evaluation) based on the
potential value of losses and gains rather than the final outcome, and USE
heuristics. The model is descriptive: it tries to model real-life choices, rather than the
the best decisions.

 Prospect Theory can be applied to consumer psychology and product adoption. It

explains the psychological impact of gains and losses, showing how “losses loom
larger than gains” (loss aversion).

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 How to make
GOOD decisions?

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 Reference Class Forecasting
Outside view, Curbing Biases
 From Nobel Prize to Project Management, Getting Risks Right.
 “American Planning Association (APA) encourages planners to use reference class
forecasting for non-routine projects such as stadiums, museums, exhibit centers,
and other local one-off projects “ (Flyvbjerg & Aalborg 2006)
 "outside view" on prospects being forecasted

What actually Reference Class Forecasting is?

Holy Quran says:

"And make Mashwara (Consult) with them in affairs (of importance). Then when you have
firmly decided, have trust on Allah. Verily Allah loves those who have trust (in Him)" (Sura 3:
Al- Imran, Verse 159)
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 Thanks for your patience / participation!

 Questions?

 AQA hypothesis: The inside story, Cognitive Process

underlying Decision Making – Author’s contribution

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What we know/ have,
doesn’t make the
difference BUT what
we don’t know/ have
dictates the decision
making or behavior.

AQA
hypothesis
“Mise en place”
"putting in
31 place"
 Decision Making
linked with
Knowledge
Representation and
Retrieval

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 Author’s hypotheses (especially AQA)
 Human brain/ mind/ cognition DOESN’T have the ability to process persistent question
(mark), probability, uncertainty, hole.
 What we know/ have, doesn’t make the difference BUT what we don’t know/ have dictates the
decision making or behavior.
 Sense making (Weick, 1995) why? structuring the unknown (Waterman, 1990) but why?
 Why not the change occurring? Because the stakeholders haven't made sense of. So when they
will make sense of? and Why to make sense of? AQA
 Saticficing (Simon, 1977) but why?
 Cancellation, Simplification, Segregation (Kahneman, 1979) but why?
 Heuristics (Kahneman, & Tversky, 1974) but why use?
 Biases (Kahneman, & Tversky, 1974) but how come into being?
 When Schema finalised?
 RAWFS heuristic (Kslein, 1989), Reducing uncertainty , Assumption-based reasoning (Filling
in gaps), Weighing pros and cons, Forestalling, Suppressing uncertainty , but why?

 Entrepreneurial opportunity recognition is ONE-WINDOW operation. Creativity connected

with knowledge representation, which in turn connected with one-window operation.
Underling this, is the AQA model (hypothesized)
 The issue is how to put yourself (leader-self/ manager-self) on work? How to utilize yourself
to your limits? This is not the issue how to manage or lead others but manage or lead yourself?
The others or the organization is not the problem but the problem the manager, the leader
itself. Beware of yourself (150 biases). Know the underlying process of decision making.

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