Subject category:
Economics, Politics and Business Environment
Published by:
IESE Business School
Version: 18 October 2006
Revision date: 21-Jul-2015
Abstract
Managers typically make their decisions under many constraints (time, resources, skills, emotions, and ability to process all the information) that limit their 'rationality.' Therefore, they frequently rely on intuition in 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.
About
Abstract
Managers typically make their decisions under many constraints (time, resources, skills, emotions, and ability to process all the information) that limit their 'rationality.' Therefore, they frequently rely on intuition in 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.