The Business Of Managing Decisions: Understanding The Place Of Uncertainty
Source: University of Chicago (Booth)
If introducing a new product line creates a small probability of losing a few million dollars and a large probability of earning many billions of dollars, it seems clear that the new product line should be introduced. But does what we know about managerial decision making suggest that the new product line will be introduced? Unfortunately, a great deal of research suggests that many decisions involving uncertainty go awry. It appears that people make systematic errors in reacting to the probabilities of events. In particular, decision makers may exaggerate the importance of small probabilities, understate the importance of large probabilities, and be generally insensitive to changes in probability that fall between those two extremes.