1.

Information: Efficient markets-Perfect and symmetric information-Market participants are Rational

beings Uncertainty: Gaussian (black Sholes model) People: Homo-economicus (Rational man)Infallible superman with perfect knowledge and judgment-Selfish and calculating-No emotions
whatsoever
2. Perception- Leibowitz hypothesis:Speed, Ledoux-text sign replaced by pictures, Menon:double
whistle
3. Intentional blindness: Focus so hard on something that we become blind to the unexpected even
when we are staring at it, It is easy to miss details when you are not looking for them. Less of memory
thing, Bear(Gorilla) expt
Change blindness, failure to detect changes in the environment caused by visual (or other)
distraction. Short term memory failure to store info about current environment. Comparison of one
image to other image that is held in memory.
4. Types of perceptual learning :( Assimilation): Concept-driven, top-down processing perceptions
guided by expectations and prior knowledge (quicker perceptual recognition, improved comprehension
& recall; anchoring and confirmation biases), info ambiguous
(Accommodation): Data-driven, bottom-up processing perception guided by objective characteristics
of the stimulus, children
5. Properties of perception: Holistic, Constructed (preference, memory), Contrast & assimilation,
Relative (cone), Automaticity, Adaptation (impact bias), Expectation self-fulfilling prophecy, Brands--6. Just noticeable differences (JND): Perceptual system works on percentage increments. Absolute
levels are important(1kg,100gm), (5 kg,100gm).
Weber-Fechner law: I / I = K I is the intensity of stimulus; K = constant across levels of
I(1kg,100gm), (5 kg,100gm)
Stevens power law: (I) = kI (I) represents subjective magnitude of sensation lpha depends on
type of stimulus
7. Diminishing sensitivity: how much you value something depends on context.(200Rs save
100metres, or walk 5km,or suit)
8. Impact bias: People do not foresee their level of adaptation or how quickly they will adapt (impact
bias). Tendency to overestimate our emotional reaction to future events. Research shows we dont feel
as bad as we expect when things go wrong.
9. Automaticity is the ability to do things without occupying the mind with the low-level details
required, allowing it to become an automatic response pattern or habit. It is usually the result of
learning, repetition, and practice. Faster/cognitive miser
10. Neuromarketing: Studies cognitive and affective responses to marketing stimuli & consumer
preferences
Uses fMRI, EEG, heart rate, respiratory rate, galvanic skin response
You evaluate things with data you have. You simplify things and u dnt capture details- beer beer+
1. Halo effect: Drawing general impression from a single characteristic (like knowledge, intelligence
etc)
2. Stereo-typing: Judging someone on the basis of our perception of the group to which he/she
belongs
3. Self-Serving Attributions: Own actionoutcomegood/baddispositional/situational.
Maintaining a positive self-image/high self esteem
4. Fundamental attribution error: underestimating role of chance in life. Others
actionoverestimate internal underestimate situational
1. Decision making choice & judgement. No magic formula. Decision making is an art AND science.
Needs constant practise.
Decision making as a process v/s decision making as a outcome. Closest guarantee to a good outcome
is a good process.
2. Risk: danger + opportunity. Reducing risk reduces opportunity. Trade-off exists.
3. Goal of decision modelling Behaviour =f (Decision problem, Env. factors, Psych. factors)
St.Petersburg paradox: lottery game though infinite earning you will give 2 or 3 Rs
4. Gambling paradigm: Gambling among different prospects which are risky and each prospect is
given value.
5. NPV is not used in decisions like mergers acquisitions/new product/geography. Scenario analysis
create multiple scenarios compare between best and worst case (gives measure of overall risk).
6. Scenario Analysis: Steps in scenario analysis: Determination of critical factors (e.g., state of
economy, regulatory)
Determine values each factor can take/Create multiple scenarios & determine outcomes (cash flows)
for each
Assign probabilities to each scenario/Do sensitivity analysis.
7. Risk neutral: expected value/ risk taking: utility.

1. Prospect theory: Reference point, Loss aversion, Risk averse for gains and risk seeking for losses,
Probability weighting.

v(X)

Loss means 2.25 times more than that of profit. People use ~2 in model. Slope is 2times stepper in loss
domain than in gain.
Risk seeking in loss domain & risk averse in gain domain
X

Psychophysics of probability perception: people overweigh/overreact lower probability and underweight

higher probability.
1. Economics v/s psychologyrational v/s real behaviour
2. Rational agent-Calibrated/Perfect knowledge/Stable preferences/Full selfcontrol/Selfish/Calculating/Emotionless
Implications-People maximize/whats knowable is known/All opportunities exploited
3. Bounded rationalityHerbert Simon-People do not optimize in the rational manner described by
economists/They conduct a less than complete search for alternatives/They then choose an option that
meets a certain threshold of satisfaction. That is, they Satisfice, not Optimize. This may be a generally
efficient strategy, given time & resources, BUT
4. Are we in control of our decisions? People are not good at comparing they cling to reference
points>> compromise effect
5. Intuitive: Automatic/Emotional/Fast/Much older/Parallel processing/Unlimited capacity/flow
effortlessly/mostly it determ
REFLECTIVE/Analytical: Deliberative/Cold/Slow/Relatively new/Sequential processing/Limited
capacity/when stakes high
6. Framing: The way a problem is framed can profoundly influence the decision you make. Example:
Framing as gains vs. losses.Framing with different reference point How to avoid? Reframe problems in
various ways>When others recommend decisions, examine the way they framed the problem.
Challenge them with different frames.
7. Availability/saliency bias: Being overly influenced by vivid & recent memories while making
judgments/estimations. Example: Purchase manager chose supplier whose name was most familiar.
Turned out suppliers name was in the news for extortion charges. How to avoid? Examine all
assumptions to ensure they are not influenced by your memory/Get actual statistics, not just
impressions
8. Confirmation bias: Seeking only & overweighing info that supports your existing pt of view.
Example: A CEO considering cancelling a plant expansion asks an acquaintance, who cancelled such
an expansion, for advice. She, of course, says to cancel. How to avoid? Examine ALL evidence with
equal rigor, confirming & disconfirming>Ask a respected colleague to argue against your view> Avoid
yes-men>Advisor against the deal - compensated if merger did not go through (Warren Buffet)
9. Anchoring Bias: Giving disproportionate weight to the first info you receive (relevant or irrelevant;
quantitative or qualitative) Example: A marketer projects future product sales by looking only at past
sales figures. In a fast-moving market, poor forecasts result How to avoid? Pursue other lines of
thought in addition to your first one>seek info from a variety of people and sources after thinking
through the problem on your own>Avoid anchoring your advisors by revealing your ideas/judgments>in
negotiations.
1. BIG 5OCEAN: Conscientiousness/Agreeableness/Neuroticism or emotional stability/Openness to
experience/Extraversion
2. Self-report surveys-Most common; easy to administer/Drawback incorrect reporting Observerratings surveys-Perceptual issues/Conflict of interest issues Projective measures (Rorschach inkblot, Thematic Aptitude Test)-Inconsistent/Not effective
3. Myers-Briggs Type Indicator (MBTI): Extraverted (E) vs. Introverted (I)/ Sensing (S) vs. Intuitive (N)/
Thinking (T) vs. Feeling (F)/ Judging (J) vs. Perceiving (P)
1. Self-interested bias: Is there any reason to suspect errors motivated by self-interest? Review the
proposal with extra care, especially for over optimism 2.Heuristic: Has the team fallen in love with its
proposal? Rigorously apply all the quality controls on the checklist.3.Groupthink: Were there
dissenting opinions within the team? Were they explored adequately? Solicit dissenting views,
discreetly if necessary.
4. Saliency Bias: Could the diagnosis be overly influenced by an analogy to a memorable success?
Ask for more analogies and analyze similarity to current situation 5.confirmation bias: Are credible
alternatives included along with the recommendation? Request additional options 6.Availability bias:
If this decision had to be made again, what information would you want? Use checklist of data needed
for each kind of decision 7.Anchoring bias If this decision had to be made again, what information
would you want? Use checklist of data needed for each kind of decision 8.Haloeffect Does success in
one area justify success in another? Eliminate false inferences and ask the team to seek additional
comparable examples 9.Sunk cost and endowment fallacy: Is the team overly attached to past
decisions? New investments should be made, disregarding past expenditures that dont affect future
costs or revenues

10. Optimistic biases: Three contributing factors:- Overconfidence, Planning Fallacy, Competitor
Neglect. Take an outside view; use war games 11.disaster neglect Is the worst case worse enough?
Conduct a pre-mortem 12.loss aversion: Is the team overly cautious? Realign incentives to share
responsibility for the risk or to remove risk